How to boost your retirement savings plan
Millions of Americans use their company 401(k) plan to save for retirement. If you qualify for one at work, a 401(k) can be a great way to save money and invest for your future while also getting a tax deduction. But there are limits to the account to consider when putting together your retirement strategy.
Here are some ideas to keep in mind as you save for retirement to help you get the most out of your 401(k) while also experiencing the benefits offered by other types of accounts.
Max out your employer match
As an employee, there's a good chance your company will contribute funds, or "match" your savings, in your 401(k) plan. Depending on where you work, that employer match might be, for example, 50% of every dollar you put in, up to 5% of your salary.
If your annual salary is $60,000 per year, and you contribute 5% of it to your 401(k), that means your 401(k) savings would be:
Your contributions: $3,000
Your employer match (50% of up to 5% of salary): $1,500
Total saved for retirement: $4,500
If you can get an employer match on your 401(k), you should definitely try to contribute enough money to the account to qualify for that full amount of employer matching money. That matching opportunity is part of your overall compensation at your job, but it's almost like “free money" that helps boost your savings. Don't leave it on the table.
Decide whether to make 401(k) contributions up to the maximum limit
What if you want to save even more money than it takes to get that employer match? Should you keep putting additional money into your 401(k)?
For 2021, the IRS lets most people contribute up to $19,500 per year to their 401(k) plans. Employees who are age 50 or older can also make additional “catch-up contributions" of up to $6,500 per year over these limits.
So that's the most you can save every year in your 401(k). However, keep in mind that if you put this money into your 401(k), your money is going to be (hopefully) locked up in that retirement account for a long time. You usually cannot withdraw money from your 401(k) without paying penalties and owing taxes.
Beyond the 401(k):
If you have a 401(k) account and you are already contributing enough to get the full employer match, it could make sense to contribute over your employer match or explore a Roth IRA. If you qualify, a Roth IRA (Individual Retirement Account), can help you save up to $6,000 per year on a post-tax basis. That means when you withdraw the money in retirement, you won't have to pay taxes on it, as you will with 401(k) withdrawals.
Another advantage of a Roth IRA is that the account is more flexible. You can use Roth IRA money to help buy a home or for higher education expenses. A financial advisor can help you determine if a Roth is right for you.
Another type of investment account, if you are already contributing as much as you can to your tax-advantaged retirement savings accounts like a 401(k) and Roth IRA, is a taxable brokerage account.
With a brokerage account, you can buy stocks and bonds and other investments. Since this account is not tax-advantaged, you do not get a tax deduction (like a 401(k)), and you are not given tax-free withdrawals later on (like a Roth IRA). Instead, you will owe capital gains tax on any investment profits. If your investments decline in value and you sell at a loss, you might also be able to claim a tax deduction on those investment losses.
A brokerage account is a good way to invest money outside of your retirement savings accounts, especially if you are investing for other medium-term financial goals such as a dream vacation or a home down payment. But keep in mind that investing in stocks and bonds and other financial assets can be risky; market prices can go down as well as up.
Emergency Savings Fund
Saving for retirement is a wonderful goal, and you should try to save as much as you can. However, some people only focus on long-term retirement savings and forget about having cash available for emergencies.
Ideally, in addition to your retirement savings, you should have an emergency fund with three-to-six months' worth of cash in a safe, FDIC-insured bank savings account. The COVID-19 pandemic has taught us that life can be unpredictable and building a solid financial foundation can make a difference. You should try to build up some cash savings that you can use for an emergency at any time without having to withdraw money from your 401(k).
Don't assume that your 401(k) account is the only way to save and invest for the future. If your company offers a 401k, it should be your main retirement savings vehicle. But consider balancing it with other retirement plans and investment accounts so that you can maximize your retirement opportunities.