Retirement savings create retirement income. It’s important to keep that up front when contemplating how much you want to put aside each pay period. The IRS allows tax-deferred contributions of up to $22,500 per year with a 401k retirement plan. If you’re over 50, that goes up to $30,000 per year. Here are some tips on how to “max out” those contributions:

  1. Take advantage of employer match programs

Employers may match a percentage of your retirement contribution with either cash or company stock. That’s free money. If your employer will match up to 6% of your income, make sure you contribute at least that to your 401(k). The match does not count towards the maximum contribution limit set by the IRS, so you can still put aside the full $22,500 (or $30,000).

  1. Reduce your tax liability for the current tax period

401(k) contributions are tax-deferred and come out of your paycheck before your income tax is calculated. That means you’ll pay taxes on a smaller income during the current tax period and may even move into a lower tax bracket. Income taxes on the contributions won’t be due until you withdraw them, which you can do after age 59 ½.

  1. Select aggressive models to accelerate growth

The 401(k) plan administrator should present you with several investment models to choose from. They’re generally classified as conservative, moderate, or aggressive. The aggressive models are heavily invested in growth and dividend stocks, where you have the best opportunity for accelerated growth. It’s riskier, but the rewards are much higher.

  1. Evaluate fund costs on your 401(k) statement

Your 401(k) statement should show all the funds you’re invested in and their respective costs. Evaluate those fund costs and speak with your plan administrator to see if there’s an option to move off the more expensive ones. This may require a change in investment models, or the administrator could trade out those funds for something more cost-effective.

  1. Open a Roth IRA for additional savings

The IRS allows you to save an additional $6,500 in a Roth IRA or traditional IRA if you have extra money left over after maxing out your 401(k). The benefit of a Roth IRA is that the contributions are made after income tax on them has been paid, creating a tax-free income in retirement. There’s also no required minimum distribution age on a Roth IRA.

  1. Withdraw only when it’s required

The required minimum distribution (RMD) age for a 401(k) plan is 73 years old in 2023, and it’s going up to 75 over the next few years. One key to getting the maximum return out of your retirement fund is leaving the money there as long as possible. Returns compound over time. Wait until the RMD age and then take only what you need.

  1. Never touch the principal

There will be times in your life when you feel the need to tap into your retirement savings. Examples of this are when you lose your job or want to remodel your kitchen. Find another alternative. The best tip we can give you on maxing out your 401(k) is never to touch the principal. Save it for retirement. That’s what it’s there for.

The Bottom Line

You can max out your 401(k) by contributing the maximum the IRS allows. That’s currently $22,500 per year, $30,000 if you’re over 50. You’ll also want to maximize your returns by taking advantage of employer matches, choosing a more aggressive investment model, and cutting high-cost funds. Open a Roth IRA if you have extra funds and don’t touch the principal on your 401(k) until the required minimum distribution age.


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