Contributing to Your 401(k) Account
You can contribute a portion of your income to a tax-deferred 401(k) account with each paycheck, according to the annual limits set by the Internal Revenue Service (IRS). Some employers may offer matching programs, where they contribute an equal amount to help grow your balance. It’s clearly a good idea to put in as much as possible and maximize your contributions to your 401(k).
When Should You Max Out Your 401(k)?
The maximum amount you can contribute to a 401(k) plan is $19,500 in 2021, increasing to $20,500 in 2022, or $26,000 in 2021 and $27,000 in 2022 if you are 50 years old or older. You may want to max out if you can easily reach the maximum contribution based on the annual limits without significantly impacting your budget.
When Should You Avoid Maxing Out Your 401(k)?
Of course, not everyone is in a position to add $20,500 annually to their retirement plan. If you earn $50,000 a year, that amount represents 41% of your total income – some of which you may need to cover your living expenses. It’s reasonable to assume that you may not have the extra cash flow needed to achieve that. Each year comes with a new enrollment period, so you can always choose to increase your contribution over time if your financial situation improves.
Financial Considerations Before Maxing Out Your 401(k)
Your 401(k) isn’t the only thing that needs funding during your working years. There are a few key financial goals that most experts agree you should focus on before putting all your extra cash into your 401(k). Ask yourself: Do you have at least three to six months of essential living expenses covered in an emergency fund? Have you paid off any high-interest debt such as credit cards, personal loans, car loans, or any other debts? Are you on track to meet any financial goals like having a baby, paying for a wedding, or buying a home? Is there a major purchase or important event you want to achieve? Do you have life insurance to provide for your loved ones?
Other Important Financial Goals to Consider
While determining how much to contribute to your 401(k) based on your unique financial situation, there are some other things to consider. Do you have a formal financial plan that includes a will and other important documents (such as your living will, healthcare proxy, and powers of attorney)? Can you cover healthcare expenses? Make sure you are putting enough into your Health Savings Account (HSA) now and in the future to cover health care costs if you have a high-deductible health plan with an HSA. Do you have adequate disability insurance coverage to protect you and your family if you are out of work for six months or more due to illness or injury? Do you have long-term care plans as you approach retirement?
Frequently Asked Questions (FAQs)
Which should I max out first, my 401(k) or my IRA?
You should prioritize maxing out your 401(k), at least until you hit the maximum for any matching contributions your employer offers. You can pay more attention to your IRA contributions once you’ve done that.
How much
How much money will be deducted from each paycheck if I maximize my 401(k) contributions?
The annual maximum contribution is $20,500 for 2022. This equates to about $788 per paycheck in 2022 if you are paid bi-weekly, resulting in a total of 26 paychecks per year. Taxpayers aged 50 and over are granted an additional contribution of $6,500, bringing the annual limit to $27,000.
What percentage of workers max out their 401(k) contributions?
Data from the Internal Revenue Service found that over 5.1 million Americans maxed out their retirement plan contributions in 2018. This represents about 3% of the total workforce of approximately 162 million workers by the end of that year.
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Source: https://www.thebalancemoney.com/why-you-should-and-should-not-max-out-401k-4161307
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