5 Ways to Squeeze Every Penny Out of Your 401(k)

Used well throughout your career, your 401(k) plan can help you reach millionaire status by the time you retire. If you really put your mind to it and effort behind it, you might even be able to blow past that level.

The thing is, though, that while the basic concept behind the 401(k) is simple, getting the absolute most out of it can be pretty complicated. It depends on lots of factors, including what the plan offers, your salary, and your age. With that in mind, here are five ways to squeeze every penny out of your 401(k).

No. 1: Maximize your match

One of the most powerful benefits that many 401(k) style plans offer is an employer match. It’s so powerful, in fact, that investing to get and maximize that match is typically the first investment you should make if it’s available to you. The trick here, though, is making sure you understand the terms by which the match is made, so that you can get every penny you’re eligible to receive.

Companies can choose their matching formula, as long as they abide by IRS limits. A typical match is 50% of your contribution, up to 6% of your salary. Depending on your plan’s specifics, your match may be based on a per-year or a per-pay-period basis. If your match is on a per-pay-period basis, then you’ll need to contribute throughout the year to truly maximize your match.

Miss contributing for a paycheck because you’re paying off bills? You won’t get that match. Forget to up your contribution when you get a raise? If you weren’t already contributing enough, you’ll miss out on some of that increased match.

Your 401(k) match can provide some of the strongest returns you’ll ever get investing, so figuring out what you need to do to make the most of that match will serve you well.

No. 2: Hit your contribution limit

In 2021, the typical contribution limits are $19,500 per year if you’re under 50 or $26,000 per year if you’re 50 or older. If you’re considered a highly compensated employee, you may face further limits as to what you can contribute, based on things like how other employees at your company participate in your plan.

If you’re looking to squeeze every penny out of your 401(k), contributing enough to max out what you’re allowed to is a key step along the way. After all, since contributions are limited by year, missing out on a contribution represents a permanent loss in what your account can potentially grow to become.

No. 3: Pick Roth over Traditional

Whether you invest in a Roth 401(k) or a Traditional 401(k), the limits are the same. Still, every dollar inside a Roth 401(k) is likely to be worth more to you than the same amount of dollars in a Traditional 401(k). That’s because you can make qualifying withdrawals from your Roth 401(k) in retirement completely tax free, while withdrawals from Traditional 401(k)s are generally taxed as ordinary income .

The thing to remember, though, is that while Roth 401(k)s give you that great tax benefit when you withdraw your money in retirement, Traditional 401(k)s give you a tax deduction when you contribute. As a result, it will require more up front in terms of spendable cash to max-out your Roth 401(k) than it would to max out your Traditional 401(k). Still, when compared with the crazy cost and tax implications that can come from having a large Traditional 401(k) balance, the trade-off is generally worth it.

No. 4: Look for the opportunity for a mega-backdoor Roth

Some employers offer their people the opportunity to leverage their 401(k) and a Roth IRA to fund something known as a mega-backdoor Roth IRA. Not all plans allow this, however, but if yours does, it can be an outstanding way to truly get the most out of what’s available from a company-sponsored retirement plan.

The mega-backdoor Roth IRA takes advantage of the fact that the total annual contribution limit to a company-sponsored plan for an employee is $58,000 ($64,500 including age 50-plus catch-up contributions). It also depends on whether your employer allows both in-service withdrawals from the plan and after-tax contributions above and beyond the standard deferral limit.

In essence, if all the stars align and your salary is large enough to support it, you can include those after-tax contributions above and beyond your regular contributions. Then, by quickly converting those additional contributions to your Roth IRA, you can get much more money into that sort of retirement plan than would otherwise be allowed.

Not all employer-sponsored plans have the provisions to allow these mega-backdoor Roth IRAs, but if yours does, it can certainly help you supercharge your very tax-advantaged retirement savings.

No. 5: Focus on long-term potential

The first four approaches focused more on getting money into your account. When it comes to squeezing every penny out of your 401(k), how your money is invested also matters. Many plans include default investment choices that may be a bit on the conservative side from an investment return perspective. Typical defaults will include a money market fund, a pre-mixed balanced fund, or a target-date retirement fund based on your age and presumed retirement year.

The challenge with the default approaches is that they don’t tend to be designed around maximizing your long-term returns. Instead, they tend to attempt to either minimize the risk of losing value or seek out some volatility-adjusted risk-vs.-return profile that doesn’t necessarily deliver strong overall results.

In reality, if you have a long-term focus and a decent amount of time before you retire, you can wait out the market’s volatility. In fact, with a dollar-cost averaging strategy, a decline in the market often becomes an opportunity to buy more shares while they’re on sale. A strategy focused more on the long-term potential instead of minimizing volatility or the risk of decline can go a long way toward improving your overall long-run rate of return.

That focus on long-term return potential can help your money grow faster over time, which can help your 401(k) reach its largest total potential value over your career. And that’s key to squeezing every penny out of your 401(k).

There’s no time like the present to get started

The good news about these five approaches is that you can put them to work even if you’re a bit behind your target when it comes to saving for your retirement. As long as you still have the time to let the market work its magic, you can use them to help squeeze every penny you can out of your 401(k). That can help you get closer to where you would like to be to have a financially comfortable retirement.

The key to remember, though, is that the sooner you get started, the better your chances are of ultimately reaching your goal. So start putting these approaches to work for you now, and give yourself the best opportunity to let your 401(k) serve as a strong centerpiece of your retirement plan.

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Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.