Gabe Fransen | July 22, 2024
According to InvestmentNews, for the first time, more than 70 million private-sector employees in the US had access to a 401(k) in 2023. This is up 6.35% from the previous year. We believe some of these individuals don’t know how to maximize this benefit.
A 401(k) is a company-sponsored retirement plan. The general concept is, you put money in (in some cases the employer contributes for you as well), you receive a tax benefit and you get closer to your retirement goals. Unfortunately there are some that never get to the first step, which is putting money in or fail to maximize this benefit. We want to share with you 5 points to help maximize your 401(k) plan.
- Investment Options
- A 401(k) is not an investment option, it is a type of investment account. After 401(k) contributions are made, the money still needs to be invested
- Having professional account management can increase performance and reduce fees
- Company Match
- We often encourage 401(k) participants to take all the free money they can get from company match options provided in their 401(k) plan
- For example, if a company provides a 6% match and you earn $100K and contribute 6% ($6,000), the company also contributes 6% ($6,000), which is essentially $6,000 a free money that goes into your 401(k) account
- Tax Benefit
- Traditional 401(k) can give you a current year tax benefit. For example, if you contribute $10,000 to your traditional 401(k) and you are in the 22% tax bracket, that saves you $2,200 on your taxes for that year
- Roth 401(k) can give you tax benefits in the future. For example, if you contribute to your Roth 401(k), those contributions will grow tax-free and distributions in the future will be tax-free
- Contribution Limits
- The tax benefits don’t come without restrictions
- As documented on IRS.gov, in 2024 the contribution limit for 401(k) plans is $23,000, which is up from $22,500 for 2023
- For 401(k) participants that are over 50, the catch-up contribution limit is $7,500 which means the limit for folks over 50 is $30,500
- Tax Planning
- It is important to remember, you are not avoiding taxes with 401(k) contributions, you are deferring them
- Example, If your $50,000 in 401(k) contributions grow to $200,000, you will owe taxes on the entire $200,000, this is taxed at your ordinary tax rate for the year of distribution
- It is wise to plan early for those future distributions
