3 Tips For Getting the Most Out of Your 401(k)

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3 Tips For Getting the Most Out of Your 401(k)

Are you saving for retirement? If you’re employed, the answer should most definitely be “yes.” While retirement may seem a long way off now, starting to build up your funds early can pay off big once you reach your golden years. That’s why many employers offer their full-time (and sometimes even part-time) employees the opportunity to contribute to what’s known as a 401(k).

In short, 401(k)s allow you to set aside a certain percentage of your pay that will sit in a tax-sheltered account. Often times these accounts are then invested in some way, allowing you to earn returns on your money. For these reasons and more, 401(k)s are a must for the vast majority of employees. Follow these tips to get the most out of your employer’s 401(k) plan:

Enroll ASAP

Before you can start taking advantage of all the perks that come with contributing a 401(k), you’ll need to enroll in your employer’s plan. Unfortunately many companies hold off 401(k) eligibility until the employee has been with the business for a certain length of time. While your human resources department should inform you when you become eligible, it’s always in your best interest to know when this date is coming up and follow up with the right person if you don’t hear anything.

Max out your matching

Beyond the tax perks inherent to many retirement savings accounts, the big draw of a 401(k) is often the employer matching funds. Basically this means that, as you make contributions to your account, your employer will add money as well. Before you get too excited, employers will put a cap on how much they’re willing to match and these maximums will vary by company. Because of this, job one should be to ensure that you’re contributing whatever amount you have to in order to receive the full benefit of matching funds.

In some cases the structure of these matching funds can be a bit confusing. For example your company might match you dollar for dollar up to 2% of your salary but then only match half of your contributions up to 4%. If you’re confused or have any other questions about your company’s plan, be sure to ask someone so you can get the most out your contributions.

Reevaluate your contributions when needed

From time to time, you may want to look at how much you’re contributing to your 401(k) and decide to make a change. If you’re recently received a raise or promotion, you may consider upping your contribution percentage. Even though this added amount won’t be matched by your employer, it will help to reduce your tax bill and, of course, serve you well once you reach retirement.

If you’re already contributing well above what your employer will match, you may contemplate reducing your contributing percentage but only for the purpose of adding to a different retirement account instead. In some cases, you may actually find more benefit in opening and contributing your extra funds to a Roth IRA, which allows you to pay taxes on your money upfront but make withdrawals on your money and any gains tax-free (as long as those pulls happen after your over 59 and a half). However, keep in mind that the annual contribution limit for an IRA is typically much lower than for a 401(k). In fact the current annual limit is $18,000 for 401(k) and only $5,500 for an IRA. As a result it may take some clever planning on your part to see what contribution combination makes the most sense.

It’s never too early to start thinking about and saving for your retirement. One of the best tools for building up your retirement fund is to contribute to your employer’s 401(k) plan. Furthermore, by enrolling as soon as you’re eligible, ensuring you’re receiving the most matching possible, and reevaluating your contributions when possible, you’ll not only get the most out of your 401(k) but also set yourself up for a happy retirement.


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Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

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