Meeting the Maximum 401k Contribution
Whether you’ve been diligently saving your whole career or are catching up with your retirement goals, a 401k plan may be one of your smartest investments. Especially if your employer matches your 401k contributions.
Just remember this golden rule: get all the free money available.
Like most retirement plans, a solid understanding of 401k contribution rules and a strategy can make your 401k contributions more efficient and profitable. Yet it can be hard to keep up with annual changes to 401k contribution rules. The start of this year was no different.
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Fortunately, we’ve put together this handy guide to 401k contribution limits, which will help:
- Determine how to push the boundaries of your maximum 401k contribution
- Get the most out of your retirement plan despite 401k contribution limits
- Maximize your boss’s role in your retirement despite 401k employer contribution limits
- Overcome solo 401k contribution limits to get the most out of your self-employment
- Point out common mistakes when setting a 401k contribution strategy
Since it’s a new calendar year, let’s start by freshening up on the Internal Revenue Service’s updated 401k contribution rules.
The IRS’s 2017 401k Contribution Rules
The Internal Revenue Service regularly changes 401k contribution limits through what’s known as a cost-of-living adjustment (COLA), which changes the limits set to retirement plans every tax year. Typically, these adjustments to 401k contribution rules, as well as Individual Retirement Accounts, are released a few months early, to give investors time to adjust.
The catch-up 401k contribution limits, which apply to employees over the age of 50, also stayed put at $6,000. If you’ll turn 50 years old at some point before the end of 2017, you can make catch-up 401k contributions. Be sure to take advantage of this increase in your maximum 401k contribution if you meet the age requirements.
Good news if you’re self-employed or funding your own retirement plan—the IRS increased your total solo 401k contribution limits by $1,000 to $54,000.
Remember, this all sets a definitive ceiling on the amount of money you can contribute to all your retirement accounts in a single year: $54,000 or your full salary—whichever is lower.
Now that you’re up-to-date with the IRS’s 2017 401k contribution rules, let’s see how to get the most out of your maximum 401k contribution.
The Basics of 401k Contribution Limits
In a world of maximum 401k contributions, or 401k employer contribution limits, it’s easy to overlook sound investment strategies that will maximize the value of your 401k contributions. Remember: a retirement account is just another form of investing, despite 401k contribution rules.
First, participate in your company’s 401k to the fullest. Most companies now automatically enroll new employees into the company’s retirement plan, setting a default saving rate well below the 401k contribution limit. Increase it as much as your budget will allow.
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Despite 401k contribution rules, a retirement fund grows in tandem with your initial outlay. It also grows more if you start saving early. More contributions to your 401k and more time to grow will ensure a bigger sum waiting for you when you finally retire.
If you aren’t already making the maximum 401k contribution every year, do some basic budgeting. If you have financial wiggle room, simply as increase the 401k contribution taken out of your pre-tax compensation.
But your 401k contribution may be limited by affordability. You may have to cut costs elsewhere so you don’t feel the pinch of less pay showing up in your bank account. The sooner you make these decisions and bump up your 401k contributions, the more time your money will have to grow.
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Secondly, be sure to take your company’s matching max 401k contribution. It’s essentially an incentive meant to encourage retirement savings, disguised as free money.
A better way to think of your company’s max 401k contribution: it’s the bonus you’ve earned. This simple mind trick may motivate you to reach as close to the 401k contribution limit as possible.
Next, be sure to make sure your retirement portfolio is diverse. Even your 401k should mirror a sensible asset allocation philosophy for your age (more risk for growth if you’re young, steady and safe bets as you grow older).
While making your maximum 401k contributions every year, make sure you monitor your plan’s performance. Redistribute your 401k contributions to balance risk and growth.
Simple Math Tricks to Reach 401k Employer Contribution Limits
Figuring out how to maximize your 401k employer contribution limits requires a bit of back-of-the-envelope math. Every company has its own 401k contribution rules.
Most 401k contribution rules revolve around percentages, not exact dollar figures. This makes hitting the precise solo 401k contribution limits difficult.
A good rule of thumb: aim to overcontribute, rather than under. Should you reach your maximum 401k contribution before the end of the fiscal year, your company can simply cap the rest off your paycheck.
Miss your mark however, and you’ve essentially lost potential funds that would have come from your employer’s end of your 401k contributions.
Most 401k employer contribution limits follow a straight dollar-for-dollar match, up to a certain percentage of your gross salary. However, some employers 401k contribution rules differ, involving tiered systems or even varying matches.
Be sure to incorporate the specifics of your employer’s 401k contribution limits when deciphering how much you can set aside. Most likely, your 401k employer contribution limits have a set figure they can reach, based upon your income. That 401k contribution limit is your goal.
The most commonly used trick to get the maximum 401k contribution from your employer is to mirror their percentage with every paycheck. In other words, if they offer a 5 percent match on your total salary, you defer that amount from your paycheck throughout the year.
This will pull out the full dollar figure your company offers within the retirement plan’s 401k contribution rules. It will not, however, come close to the IRS’s $18,000 maximum 401k contribution limit (unless you make beaucoup bucks).
If you can stand to swipe $18,000 off your annual salary to reach the IRS’s 2017 max 401k contribution, distribute the deferrals however, you feel most comfortable.
For example, you can front-load your contributions during the beginning of the year so you take a heavier financial hit at the onset but reach the maximum 401k contribution sooner. This works best for bonus season.
You can also taper your 401k contributions throughout the year, leaving some extra cash on hand for the holidays if necessary. Be sure to stretch out the amount of time you’re making 401k contributions so your employer reaches their 401k contribution limit as well.
If you’re over 50 years old, be sure to include the catch-up $6,000 extra you can add to your 401k contributions.
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If your company pays out its 401k contributions in a lump sum rather than percentages, simply set your own deferral to reach the IRS’s 401k contribution limits by the end of the year.
Should your guesstimating prowess need help, calcxml.com has an employer 401k match tool to cut a lot of the guessing work. Check it out here. The Financial Industry Regulatory Authority has one as well.
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Solo 401k Contribution Limits: Be the Boss of Your Own Retirement
All the usual common sense rules apply to solo 401k plans, which are usually used by entrepreneurs who count themselves as their only employee.
These plans also have a solo 401k contribution limit, though it can be reached through more avenues than classic 401k contribution rules.
The typical 401k contribution limits apply when deferring salary payments, capping annual contributions at $18,000 for 2017, or $23,000 if you fall within the 50-plus catch-up category.
One of the bigger privileges to owning your own business and being your own boss is profit-sharing 401k contributions, which can make up the rest of the way to the solo 401k contribution limits.
The solo 401k contribution limits can also be met another way: rental income. Purchasing property via your solo 401k allows all rental income to flow directly into your retirement account.
Depending on the size of the property and rental rate, you can meet solo 401k contribution limits without even deferring salary.
Avoiding Common 401k Contribution Mistakes
It’s tempting, after squirreling away money diligently, to let your hard-earned 401k contributions vaporize in an instant. Saving money requires discipline, and times of need bring out desperation.
Too often, people gamble their future for short-term benefit, expedience, or panic. There are common mistakes many folks make with their retirement plans which cost them in the long run.
Maximizing your 401k contributions means allowing them to mature—age like the finest wine. To that end, do not do any of the following:
- Withdraw funds early. While that new car or TV may be easier to buy with some 401k funds, you’re essentially borrowing from your future self and losing out on compounding growth. Do not impulsively squander long-term investment funds.
- Pay unnecessary fees. Some companies offer additional investment advice to help you manage your 401k account—at a cost. Do not pay someone to tell you what you already know: diversify, assume sensible risk, and shift unexpected extra growth toward steady and reliable mutual funds.
- Stay until your employer’s 401k contributions vest: Often companies tie their 401k contribution to a certain number of years at the firm. Stick it out to make sure you do not lose your employer’s 401k contributions. Don’t quit your job unless a better deal awaits.
- Take your 401k contributions with you: Avoid withdrawing your 401k contributions from your account when you switch jobs. This can lead to costly taxes and penalties. Try rolling them over into an IRA or new 401k instead.
- Don’t panic: The stock market undergoes bumps and downturns: do not withdraw or shift portfolio positions as a result. Do not make radical changes to your 401k plan because of a rough market.
Avoid these common mistakes and stick to the maximum 401k contribution. A nice nest egg will await you at the end of your career.
Participating in a retirement plan of any variety shows a level of maturity and thoughtfulness about your future. A 401k provided by an employer or yourself can secure a comfortable retirement.
These accounts, however, do have limitations set by both the IRS and your employer. It requires a delicate balance of budgeting, forward-thinking, and long-term vision to make sure you efficiently meet maximum 401k contribution limits.
Be sure to do the back-of-the-envelope math necessary to ensure you set aside the correct amount of money for your personal budget. Then set your automatic 401k contribution to reach 2017’s $18,000 limit, at whatever pace suits you.
Try your best to meet the highest 401k contribution limits allowed—adding any other additions available for “catch-up” limits or solo 401k contribution limits.
Most importantly: be patient and disciplined. Your future self will thank you.
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