How to maximize your contributions to a 401(k) plan?
Contributing to a 401(k) plan can help you prepare for retirement. Here are ways to maximize your plan so that you can retire as comfortably as possible.
It’s never too early to plan for retirement, and one tool that can help you with this is a 401(k) plan. There are several ways to make the most of it to help you retire as comfortably as possible.
What is a 401(k) plan?
A 401(k) is a type of retirement savings plan that is commonly offered by employers, with the primary purpose of helping employees save and invest for their retirement years. Employees who meet certain criteria such as age and length of service are usually qualified to participate in a 401(k) plan.
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How can you maximize your contributions to a 401(k) plan?
Employer matching
Some employers offer a matching contribution to the employee’s plan. For example, an employer might match a certain percentage of the employee’s contributions up to a certain limit. If your employer offers a match, take advantage by making sure you are saving as much as you can. This is essentially “free money” that helps boost the employee’s retirement savings.
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Go beyond the default savings rate
The default savings rate is often having 3% of your salary deposited in the plan. This amount may not be enough to maintain your lifestyle when you retire. Increase your savings as much as you can afford to and up the percentage when you get a raise.
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Take advantage of the tax break
One of the main advantages of a 401(k) plan is its tax benefits. Contributions to a traditional plan are made with pre-tax dollars, meaning they are not subject to income tax at the time of contribution. Employees can defer paying tax on their 401(k) contributions of up to $22,500 in 2023.
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Become fully vested
Vesting refers to an employee’s ownership of employer contributions to the 401(k) plan. You will usually be unable to keep the match from your employer until you are fully vested. In some cases, there may be a schedule that determines how long an employee must stay with the company- typically a number of years- before becoming fully vested in the employer’s contributions. In certain instances, continuing to work for a company until this takes place can be worth thousands of dollars.