Castle Rock PEP

Strategies to Maximize Your 401(k): Reach the Peak of Retirement Savings!

I. Base Camp

Did you know that only 12% of 401(k) participants max out their retirement plan yearly? The top of the mountain is too far out of reach for most individuals. That’s unsurprising, considering the maximum is now $22,500 for those under 50. Achieving the maximum savings in your 401(k) can significantly impact your future financial security and retirement lifestyle. And that’s just the personal contributions, mind you. For 2023, the maximum contribution limit is $66,000, with an additional $7,500 catch-up contribution allowed for individuals over 50, raising their limit to $73,500. Does that seem astronomical? Would you like to know how to hit these highs? Here, we’ll outline strategies to help you reach these maximum savings and make the most of your 401(k)-retirement plan.

II. Understand the Game Plan – Three Components of the 401(k) Maximum

  1. Employee Elective Deferrals 💼 The maximum amount you, the employee, can contribute to their 401(k) in 2023 is $22,500. If you’re over 50, you can make an additional catch-up contribution of $7,500, raising your limit to $30,000. Depending on your plan rules, these dollars can be taken before or after tax. Should you do pre-tax or after-tax? A routinely asked question that deserves its own write-up. For now, know that, in most circumstances, as your tax rate increases, you typically want to lean more toward pre-tax contributions rather than Roth.
  2. Employer Contributions 🏢 Employer contributions include matching and profit-sharing. The combined limit of employee and employer contributions for 2023 is $61,000, or $67,500 for those over 50. Every employer’s match is different, and rules might apply differently. The typical match is 100% of the first 3% deferred and 50% of the next 2%, which ultimately amounts to a 4% match. So be sure to get at least 100% of your 401k match (so long as your other financial priorities are taken care of!).
  3. After-Tax Contributions (Non-Roth) 🌐 After-tax contributions, separate from Roth 401(k) contributions, can help you reach the maximum limit of $66,000 or $73,500 for those over 50. These contributions are made with post-tax dollars and can later be rolled into a Roth IRA for tax-free growth. In addition, some plans offer immediate, in-plan Roth conversions to keep things clean and easy for when you leave your job and ultimately take your dollars elsewhere. 


III. One Foot at a Time – Strategies to Maximize Your 401(k) Savings

  1. Max Out Your Elective Deferrals 📈 Start by contributing the maximum allowed amount to your 401(k) as an employee; remember that the limits are $22,500 or $30,000 if you’re over 50. Then, increase your contribution rate by 1% yearly around raise time! It’s the easiest thing to do, and you won’t even know it happened. So when do you stop increasing? If you’re not hitting the cap, it’s ultimately up to you, but I’d love to see everyone at 20% savings in their 401(k) (NO, that does not include employer match).
  2. Take Advantage of Employer Matching 💸 Ensure you’re getting the full employer match by contributing at least the required percentage of your salary. This is essentially “free money” and an essential part of maximizing your 401(k) savings. Assuming your debt levels are under control and you have no desire to invest elsewhere, make sure you’re contributions are at least the minimum to receive your full employer match.
  3. Leverage After-Tax Contributions 🎯 If your plan allows after-tax contributions, use them to reach the maximum limit. That’s the $66,000 level or $73,500 if you are 50 or over for those paying attention! These contributions can later be rolled over into a Roth IRA, providing tax-free growth and withdrawals in retirement.
  4. Utilize Bonuses and Windfalls 💰 If you receive a bonus, inheritance, or serious raise, consider contributing a portion to your 401(k) to help reach the maximum limit. I’m telling you, raise time is the best time to boost those numbers. If you find yourself promoted and adding a new digit to your salary, adjust your contribution amount before you get your first paycheck. You’ll never see the new salary amount and your future self will thank you.
  5. Adjust Contributions for Catch-Up Limits (Over 50) ⏫ If you’re over 50, take advantage of the catch-up contribution limit by adjusting your elective deferrals and, if possible, making additional after-tax contributions.
  6. Monitor Your Progress and Adjust Accordingly 🔍 Regularly review your 401(k) contributions and adjust them as needed to stay on track to reach the maximum limit. In addition, keep an eye on your contribution percentages and consider increasing them if your salary increases or your financial situation allows it.
  7. Start Early and Stay Consistent 🚀 The earlier you start saving for retirement, the more time your money has to grow through compounding. Maintain consistent contributions throughout your career, and you’ll be more likely to reach your maximum 401(k) savings potential.


IV. Trust in a Sherpa (Financial Advisor)

To develop a personalized strategy for maximizing your 401(k) savings, consider consulting a financial advisor with expertise in retirement planning. They can help you navigate your plan’s unique features, identify opportunities for additional savings, and create a tailored plan to help you reach your financial goals. A financial advisor can also provide guidance on tax implications, investment options, and other aspects of your 401(k) plan that impact your overall financial health. Combining your retirement accounts with your other investments can be a daunting task. Financial advisors consistently provide increased overall return as shown by this Vanguard study. This does not mean they always outperform the market, but rather invest in such a way that increases your investment types as well as comb for tax and fee saving potential that drives your annual returns higher.

V. Reaching the Peak

Maximizing your 401(k) savings can significantly improve your financial security and retirement lifestyle. You can make significant strides toward reaching your retirement goals by understanding the various components of the 401(k) maximum and employing the strategies outlined in this blog post. Remember that starting early, staying consistent, and adapting your contributions as necessary is crucial to success. Consult a financial advisor to help you create a tailored plan that aligns with your financial objectives and maximizes your 401(k) savings.

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