Introduction
You might think you know all there is to know about 401(k) plans. After all, they’re a staple of the American workplace. But did you know that your 401(k) can also be used to max out your annual contributions and get you on track toward a comfortable retirement?
In this article, we’ll cover everything from how much money you should contribute to where those dollars will go. Read on for some important tips about maximizing your savings!
What is a 401(k)?
A 401(k) is a retirement plan that allows you to save for your future. It’s also one of the most common types of retirement plans in the United States and Canada, along with IRAs (Individual Retirement Accounts).
A defined contribution plan means that you contribute money into an account, which can then be invested in stocks or other securities. The amount that you contribute is fixed, while the return depends on how well your investments perform over time.
Why should I max out my 401(k) contributions?
- You get a tax break: The money you contribute to your 401(k) is deducted from your paycheck before taxes are taken out, which means that you won’t pay taxes on it until withdrawal. This can save you thousands of dollars over time, especially if your employer matches contributions or provides other incentives for saving through their plan.
- You’re saving for retirement: If you don’t already have a retirement plan in place, maximizing your 401(k) contributions will help build wealth that can be used down the road when life gets more expensive and responsibilities pile up like kids’ college tuition bills and mortgage payments on the house they grew up in (which may need repairs).
- You’re building wealth now so it has time to compound: If someone gives me $100 today versus giving me $100 10 years from now (assuming both investments earn 7% per year), who do we think would end up with more money? The answer should be obvious!
How often should I check to see if I’m contributing enough?
- Monthly: You should check to see if you’re putting in the right amount every month, especially if your paycheck varies from one month to the next.
- Quarterly: If you get paid on a quarterly basis and don’t have much in savings, checking once every three months may be enough for now–especially if there are no big changes happening in your life (like getting married or having kids).
- Annually: Once per year is also fine if that works best for your budgeting habits–but make sure not to procrastinate!
When do I have to decide how much to contribute?
- The answer to this question depends on the type of plan you are in.
- Mandatory vs. voluntary contributions: Some employers require employees to contribute a certain amount, even if they don’t have enough money or aren’t ready to save at all (e.g., entry-level positions). Other employers allow workers to make their own decisions about how much they want or need to contribute each paycheck, though some may set up a default contribution level if no one chooses one on their own (e.g., mid-career professionals).
- How much should I actually contribute? It depends on your age, income and goals–and even then there isn’t always an easy answer!
Conclusion
There are a lot of different factors to consider when deciding how much to contribute to your 401(k). The most important thing is that you do some research and decide what’s right for you. You don’t want to over- or under-contribute, but if you’re unsure of what amount would be best then start small and increase as time goes on.
