There are several steps to make the most out of your 401k retirement plan. 401ks are powerful retirement savings plans that allow individuals to set money aside for their future. In fact, eight out of ten millionaires cite their 401ks as their main tool for wealth building. As a business professional, placing funds into a 401k offers long term, tax-deferred growth. Further, these pre-tax contributions can lower your taxable passive income. Read on to learn how to make the most of your 401k retirement plan.
Getting vested by your employer is a first step in maximizing the value of your 401k. Often, employers require a certain number of years of service before any matching contributions become legally yours. This is called vesting, and there are two types. Cliff vesting occurs when you go directly from owning 0% of your matching contributions to 100%. Graduated vesting occurs when your matching contributions increase gradually until they’re all yours. In fact, the US Department of Labor requires complete vesting after six years. However, understanding your employer’s vesting schedule is imperative because they can take your matching contributions if you decide to leave before you’re vested. Absolutely, understanding your employer’s vesting schedule to maintain ownership of your 401k funds.
The second step in maximizing your 401k’s value is to secure a 401k match from your employer. One of the most common matches is 50 cents for each dollar, up to 6% of your pay. Since the match is calculated based upon your pay, save enough of your pay to take full advantage. This way, you passively accumulate extra 401k value simply by receiving contributions from your employer. Surely, securing a 401k match is a fast and painless way to make the most of your 401k.
Pay Off Remaining Debts
Paying off any debts you may have is the third step in getting the most out of your 401k. Often, individuals ignore their savings in favor of paying off debts as quickly as possible, but it’s usually still feasible to save while paying debts. At a minimum, contribute the amount your employer matches to your 401k. From there, it depends on the type of debt you’ve incurred. For example, you’ll want to pay off high-interest debts before lower-interest debts. Often, low-interest debts allow you to still contribute to your 401k while making monthly minimum payments. However, avoid missing payments at all costs, as this can lead to default. Defaulting often significantly lowers credit scores and increases interest rates. Certainly, pay off your debts at their monthly minimums to maximize the value of your 401k contributions.
Tax Rates & Breaks
Fourth, think about your current & future tax considerations. Pre-tax 401k contributions often provide immediate tax benefits, depending on your tax bracket. There are many online calculators and other tools that estimate your amount of tax savings. In fact, several retirement plans offer Roth options that allow you to invest tax-free. If you think you’ll be in the same or higher tax bracket when receiving distributions, consider a Roth 401k. Definitely, understanding your tax rates, breaks, and brackets ensures your ability to take advantage of them and maximize your 401k’s value.
Keep It Safe Until Retirement
The final step in getting the most out of your 401k is simply to not touch the funds within until you retire. Often, it’s tempting to dip into this savings pool for material purchases, such as the newest, hottest electronics. Doing so, however, leads to many extra fees and taxes, as well as causes you to lose out on compound returns. When leaving your 401k alone, gains are typically reinvested and earn more than if they were withdrawn. This way, your 401k funds grow exponentially every year. Of course, exhaust every other cash source and account before touching your 401k.
There is a myriad of methods for getting the most out of your 401k. One method involves staying with your employer until you’re vested, so your matching contributions become yours legally. Second, secure a 401k match form your employer to passively accumulate funds simply by working. Pay off any debts you may have by maintaining monthly minimum payments to avoid defaults, which negatively impact your 401k. Think about tax rates, brackets, and breaks to minimize taxes’ effects on your 401k. This way, you can maximize your capital return on investment. Finally, keep your 401k safe until you retire to avoid early withdrawal fees and maintain its value. When searching for steps and methods to make the most of your 401k, consider the steps described above.