How to Max Out Your 401(k)

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Updated on Wednesday, February 6, 2019

If you have access to a 401(k) or another kind of employer-sponsored retirement savings account, you have the power to put a lot of money away toward your golden years.

But if you’re not maxing yours out and taking full advantage of any employer match that might be available, you’re missing a big opportunity. In 2019, you’re allowed to save up to $19,000 in a company 401(k) or up to $25,000 if you’re 50 or older.

Here’s how to ensure you’re getting the most out of your 401(k) plan.

Types of 401(k) contributions

There are three primary types of 401(k) contributions, and they don’t all come from you.

Employee contributions

There are two ways to make employee contributions. If you have a traditional 401(k), you can make pre-tax contributions that are taken out of your paycheck on each payday. Your savings grow within the 401(k), and when you withdraw the money in retirement, you’ll pay taxes on all distributions based on your income tax bracket.

If you have a Roth 401(k), you make post-tax contributions, meaning you pay taxes on your income before you invest it. But once the money is saved, it grows tax-free until your retirement, and all distributions in retirement are tax-free.

The amount you can contribute to a 401(k) and a Roth 401(k) is the same — $19,000 in 2019 or up to $25,000 if you’re 50 or older. Consider, however, that saving $19,000 in a Roth 401(k) takes more money than saving $19,000 in a traditional 401(k), since it’s after-tax cash.

It’s also possible to put a non-Roth after-tax contribution into your 401(k), but it’s not a popular savings option. Although you’re putting it into your 401(k), you must still include it as income on your tax return and it can’t be deducted.

Employer contributions

Many companies offer a 401(k) match, meaning they’ll match a portion of your contributions to the account. It might work differently at different companies. At one firm, for instance, the employer might offer to match 50 cents for every dollar of your contributions up to 6% of your salary — effectively offering you a 3% bump. If you earn $60,000 and put 6%, or $3,600, into your 401(k), the company will kick in $1,800 for free.

Another employer may match the first 2% of contributions dollar-for-dollar, or use another formula. In any case, the match is typically tied to your salary and your own 401(k) contributions. If you don’t save to your 401(k), you won’t get the match.

Non-matching employer contributions

In a plan that permits it, employers can also make contributions to your 401(k) plan even if you aren’t actively saving to it. If a plan is too “top-heavy,” generally meaning that some key employees at the top of the chain have balances that exceed 60% of the balances of all employees, the firm might be required to contribute for some employees.

How to get your employer’s full match

The first step to getting 100% of your employer match is understanding how it works. If you’re unsure of how the match is structured, contact your human resources department with your questions. If your employer offers 50 cents for every dollar you contribute, up to 6% of your salary, you must put in 6% of your salary to get the full match.

To get the full benefit of your employer match, don’t wait around — the sooner you can bump up your contribution, the better. That’s because the earlier you make contributions, the sooner you’ll get your employer match. And the sooner the match is in your account, the more time it has to grow over time. If you boost your contribution rate in October to capture the employer match for the year, you’ve missed months of growth opportunity.

At some firms, you may have to “vest” to get your full employer match. That means you gain ownership of your employer’s contributions in stages. For instance, at some firms, employees vest 20% every year they’re with the company. Once you’ve worked for the firm for five years, you’d be considered fully vested and would own 100% of your company’s matched contributions. If you leave before the five-year mark, you will forfeit the percentage of company match that you don’t yet own.

The employer match can make a big difference over time. Consider an employee named Beth. Beth earns $75,000 a year and her employer offers a straight 3% match. If she contributes 10% of her salary, she’ll save $7,500 each year. After her employer match, she’ll have saved $9,750 per year. Assuming no raises (unlikely) and a 6% growth rate, in 30 years Beth would have $795,646. Without the employer match, she’d have just $612,035 — a difference of more than $180,000.

Bottom line

To make the most of your 401(k) account, you’ll need to do two things — contribute as much as possible and take advantage of any available employer match. To the extent that you can, boost your contribution every six to 12 months until you’ve maxed out your savings. And at the very least, make sure you’re saving enough to get the full employee match. If you don’t, you’re leaving money behind.

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