Your Complete Guide to Juicing the Most From Your 401(k)

If you have a 401(k) at work, it’s a great account to use to save for retirement. A 401(k) is easy to invest in since money can be taken directly from your paycheck. And it also has high contribution limits that allow you to make a substantial tax-advantaged investment every single year.

If you want to use your 401(k) to build a secure retirement, though, there are some steps you should take to make the absolute most of this retirement plan. Here are six of them.

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1. Understand the rules for your employer match

If your employer offers matching contributions, you’ll want to claim every single dollar of this free money possible in order to get the biggest benefit from your 401(k).

An employer match means your employer puts in money when you do. There are usually specific rules for how much your employer will contribute. For example, the company may match half of the contributions you make up to 6% of your salary or match 100% of contributions up to 4% of your earnings.

The rules vary by company. You’ll want to know exactly what you must do to get your employer match so you can make the required investments and not leave any money on the table.

2. Aim to max out your tax breaks

When you contribute to a 401(k), you get a tax break. This means the government subsidizes retirement savings and helps you prepare for your later years.

The contribution limits for a 401(k) are generous. In 2022, most people can invest up to $20,500 while workers 50 and over can make an additional $6,500 catch-up contribution for a total investment of $27,000. Ideally, you’ll want to get as close as possible to hitting these contribution limits so you can get the maximum assistance from Uncle Sam.

If you can’t contribute the maximum, try to invest the most money possible to get the biggest tax break feasible for you. You can work toward increasing your investments by inching up contributions over time. For example, if you’re contributing 10% of your income now, try to invest 11% in your 401(k) in a few months, then 12% shortly after that. You may find that the small increase doesn’t make much of a difference in your daily living — but it can make a big impact on your nest egg over time.

When you get a salary increase, you may also want to divert most or all of your raise to your 401(k) to try to get closer to maxing out your contributions. You aren’t yet used to the extra money in your paycheck, so you won’t miss it if you use it to get more value from your 401(k).

3. Make the right choice about a Roth vs. traditional 401(k)

If your employer offers a choice of a traditional or Roth 401(k), carefully consider which is best for you.

Traditional 401(k)s provide a tax break in the year you invest. If you put $1,000 into your account, your taxable income will be reduced by that $1,000 contribution and you won’t pay taxes on the money. When you reach retirement age, however, withdrawals from your 401(k) are taxed at your ordinary rate.

Roth 401(k)s do not offer an up-front tax break, but you are allowed to make tax-free withdrawals as a senior. Your tax savings is deferred until later. If you expect that your tax rate will be higher as a retiree, a Roth 401(k) is usually the better choice. But if you think you’ll be taxed at a lower rate in retirement, a traditional account may be best.

4. Choose the right investment mix

You have a choice of what to invest your 401(k) money in. To get the most out of your 401(k), you’ll want to be sure you build a diversified portfolio that’s neither too conservative nor too aggressive based on your age and retirement timeline.

Many 401(k) accounts offer target date funds. These allow you to select a chosen retirement date. The fund will invest your money into an appropriate asset mix for you given your retirement timeline. However, target date funds often come with high fees and may not perfectly reflect your own tolerance for risk.

You can also pick and choose which funds to put your 401(k) money into from among the pool of different investments offered. This can be a better approach if you don’t mind doing a little research and regularly rebalancing your portfolio around once per year.

5. Watch out for account fees

Some 401(k) accounts charge administrative fees. The investments available within your 401(k) plan may also charge fees. You’ll want to understand your investment costs as the higher the fees you pay, the lower your effective returns.

If your 401(k) fees are very expensive, then the best way to use this account may be to invest only enough to get your employer match and then contribute to another type of retirement investment account such as an IRA. IRAs can be opened with any brokerage firm, there are typically no fees for maintaining your account, and you’ll almost always have a much broader choice of investment options in your IRA compared to your 401(k). In fact, you can invest in stocks, cryptocurrencies, and a host of other assets in many IRAs.

6. Consider rolling over your 401(k) when leaving your job

Finally, if you must leave your job for any reason and you have a 401(k), you’ll need to decide whether to roll over your account or not. Rolling over your 401(k) means moving the money into another retirement plan — either your new employer’s 401(k) or an IRA.

If you roll over your funds, you can keep all your retirement money in one place so you won’t lose track of your account and you can better assess whether you have the right asset allocation. You may also be able to reduce account fees or gain access to a better investment mix. You don’t necessarily have to do this — you should be able to keep the plan with your current employer. But it’s often a good idea to explore all your options.

By following these six steps, you can make the most of your 401(k) and set yourself on the path to a more secure future.

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