For a lot of folks who work a W2 job, a 401(k) retirement plan is the biggest source of savings for their retirement.
The sad reality is that most people don’t really use their 401(k) plan to its full potential. They are missing on saving thousands more per year and don’t even realize it. Let’s take a look at 10 ways to make more money from your 401k.
#1) Start ASAP
This should be a no-brainer. If your employer offers you a 401k plan start one up immediately and always contribute the minimum required in order for your employer to match it. If you can put away $5,000 a year into 401(k) and an additional $5,000 into an IRA early in your twenties you could easily have over $100,000 by the time you are 30.
One thing that sets you up well for retirement is starting very early. I know some people that don’t start saving for retirement well into their mid 30’s and I warn you, don’t start late. You will regret it once retirement does roll around.
#2) Save More Every Year
Another obvious option, but very often overlooked and dismissed. As your income begins to grow every year, you should focus on increasing your contributions to your 401(k) plan. This will speed up the rate at which you save and also reduce the amount of taxes you pay every year.
Once your income starts heading to levels where your tax bracket will change, you need to contribute even more so you can avoid paying taxes at a higher bracket. Take a look at the 2018 Federal Income Tax Brackets.
2018 Income Tax Brackets
|Rate||Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||over $500,000||over $600,000|
If you are unfamiliar with exactly what a 401k plan is and how taxes are treated, read the following post below. It will clear up a lot of the guesswork and show you how powerful it is when it comes to paying less in taxes.
#3) Take Advantage of a Roth IRA
Depending on how your company’s retirement plan options, they may offer you a traditional 401k plan and a Roth IRA.
Taking advantage of a Roth IRA in your early working years when you may not be in a high tax bracket can be a great savings addition.
- The contributions made to your Roth IRA are not tax deductible at the end of the year like your 401k contributions.
However, the income you receive from them during retirement will be 100% tax-free. It’s good to diversify your retirement options so you aren’t relying strictly on a 401k for income when your retire.
#4) Never Borrow Money From Your 401k
Unless you a serious life emergency, you shouldn’t touch your 401k plan until you are ready to retire. Don’t cash it out because you will receive a 10% penalty fee on the full value of your 401k. That is a lot of money.
- A 401k plan has an option where you can take up to 50% loan on the money in there.
You should also avoid taking out any loans because the interest rate on them can be pretty hefty. Taking money out or borrowing from your 401k will set you back from your retirement goals. Unless you have no other choice, avoid touching the money.
#5) Take More Risks When You Are Younger
When you are in your early 20’s to your mid 30’s you should have a larger percentage of your investments allocated towards equities. If the market underperforms poorly in your early years, you have a much longer time horizon for it to return back to normal.
Once you get into your early 40’s you should look to allocate a larger percent of your investments towards bonds and other less risky asset classes.
#6) Invest In Low-Cost Funds
At the end of the day, no one is going to care more about your money than you. Get familiar with the expenses associated with the funds that your money is in.
- You should avoid putting your money in funds that have an expense percentage higher than .15%.
While the potential returns may be higher with funds that have higher expense ratios, you should try to avoid them. Over the course of 20 years you can save thousands of dollars by investing in low expense funds.
#7) Rebalance Your Investment Holdings
It’s important to monitor the performance of your investments holdings at least on a quarterly basis. If you notice that certain funds are underperforming while others are performing well you should adjust your holdings accordingly.
- Unless you use a financial planner, managing your 401k is your job. Just because your company offers you a 401k doesn’t mean they are going to manage it for you.
It’s your job to:
- Monitor the performance of your 401k
- Get familiar with the available investment options
- Know your companies matching structure and vesting schedule
- Make necessary adjustments and investment selections
Become active in your 401k plan and you will appreciate how valuable it is to have one. Don’t just sit on the sidelines with your money and expect them to be ready for you when you retire.
#8) MAX IT OUT, if you can
Most people take the default savings rate of 3% for their 401k plan and call it good. Saving 3% of your salary will not get you to a very comfortable retirement.
If you have the means, you should try to max out your 401k plan. The maximum contribution limit for your 401k plan will vary based on your age. Maxing out your 401k plan will not only save you a ton of money in taxes, it will help put you ahead for retirement.
- Your max contribution to your 401k if you YOUNGER THAN 50 is $18,500
- If you are 50 and older and still working, our max contribution is $24,500
Know where you fall and how saving more can affect your retirement. These can make a huge difference in the end.
#9) Know Your Vesting Schedule
Depending on your vesting schedule, you may not get to keep 100% of your employer match until you are fully vested in the 401k plan. This can range from 1-5 years, with 5 typically being the max.
What does this mean?
If your company’s vesting schedule is 100% that means any contribution they make to your 401k plan, you get to keep immediately.
Let’s say that your companies vesting schedule looks like the one below.
This means that you get 20% of your employer’s contributions in the first year. In the second year, it moves to 40% and so forth.
Why is this important?
If you have been with a company for a period that is shorter than their vesting schedule and you are thinking about leaving, you may be leaving a good chunk of change on the table. Be aware of the vesting schedule on how it can impact you.
Companies have a vesting schedule to save money from employees that want to leave early. It can save large corporations millions of dollars per year if they have a higher turnover rate.
#10) Continue to Manage After Retirement
Once you have made it to the promised land, don’t fall under the assumption that you are done. Your 401k can still continue to grow at a very safe and conservative rate.
You can roll your 401k plan into a safe option such as an annuity which can bring you a fixed amount of income every month without any risk. There are a lot of people who blow through their retirement earnings in the first 5-10 years and are left confused and broke.
Don’t be one of these people.
Look into ways you can make your retirement income last even longer after you retire. You will be surprised at the available options out there.