Question: 401k contribution limits are so confusing. How can I ensure I’m making the right choices?
Answer: Understanding how much you can contribute to your 401k should be a fairly simple process so you’ve come to the right place for answers.
The great news is that you’ve already made a good decision by enrolling into a 401k plan. Keep making wise choices by educating yourself about your account options. Learn the 401k rules for maximum benefit.
"The safest way to double your money
is to fold it over and put it in your pocket.”
- Kin Hubbard |
You probably already have all the resources you need to gain a better grasp of the requirements of your employer’s plan. Take some time to thoroughly read over the 401k advice and literature you were provided upon enrollment as each plan can vary somewhat.
Review your personal budget and get a feel for how much you can afford to set aside for retirement out of each paycheck. If you don’t have a budget established then this is an excellent time to create one.
Once you have a clear grasp of your current personal finance budget, you can begin to create a realistic savings plan for your 401k retirement account.
Your company’s investment rep or Human Resources or Benefits department should be help you calculate your 401k contribution limits, which will be based on your annual income and the current tax code.
In general, your contribution is a percentage of your income, deducted directly from your paycheck “before” taxes are assessed. There may be both a maximum contribution percentage selected by your employer and a maximum annual dollar amount set by the government. You choose the percentage; you are not required to contribute to your 401k at the maximum level.
The 401k contribution limits set for any given plan should be simple enough to understand. The limits you should be more concerned about are those limitations that will be identified from your personal budget.
First and foremost, the amount you put into your 401k account should be a number you can afford to do without each month and continue to meet all of your financial obligations.
It will do you no good to contribute heavily to your 401k retirement account while running up debt to cover your monthly expenses. This is a long-term investment, one you should not make withdrawals from until after you reach retirement age.
The number one 401k money saving tips include: DO NOT withdraw any money from your 401k account before retirement! Doing so will be detrimental to your future earnings in your retirement years. When taking a withdrawal before retirement age, you’ll have to pay both the taxes on the amount withdrawn and a 10% early withdrawal fee. That’s a lot to lose, probably around 40% of the amount withdrawn, if not more.
Educating yourself on your finances by created a specific household budget, as well as the literature on your employer’s 401k program, should go a long way towards helping you understand your 401k contribution limits and other important aspects of the plan.
If you’re still unsure about any aspect of your plan, don’t hesitate to make an appointment with your CPA or the program administrator within the organization you work for. They can provide helpful 401k tips that can ensure your savings success.
Ask lots of questions, but don’t leave the decisions about managing your money in anyone else’s hands. Educate yourself about the ins and outs of your plan and you’ll be able to make wise choices on your own.
"Do not accustom yourself to consider debt only as an inconvenience;
you will find it a calamity."
- Samuel Johnson |
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Debt is NOT your friend. It's not a wonderful "tool" for building wealth. That's a myth.
