401(k) Tips

How long should I max 401k?

When saving for retirement, you may want to max out your 401(k) to boost your retirement savings. Find out how long you should max out 401(k).

3 min read

If you want to build a retirement nest egg, one of the tax-advantaged retirement accounts you can use is a 401(k). As of June 2021, 401(k) held an approximate $7.4 trillion in retirement assets, representing a fifth of the $37.2 trillion retirement savings in the United States. When you set a 401(k) account, you must decide how much of your paycheck goes to your 401(k).

You can max out your 401(k) contributions for as long as possible. If you earn a high income, you can start maxing out your 401(k) in your 20s to give your retirement money enough time to grow through compounding. If you don’t max out until you are 50, you can still contribute up to the annual 401(k) limit, and make an extra catch-up contribution to compensate for the years you did not contribute.

Can you max out 401(k) in your 20s?

There is no too-young age when you can max out your 401(k) contributions. If you earn a high income in your 20s, you can max out your 401(k) contributions by contributing up to the IRS limit.

Experts recommend that young adults in their 20s should contribute at least 10% of their salary to a 401(k). If you start saving early, you allow your money enough time to compound until you retire. Hence, individuals who start contributing to a 401(k) in their 20s will become 401(k) millionaires earlier than individuals in their 30s or 40s.

If you wait too long to start saving, you will have to make up for the years you did not contribute or max out. Save as much as you can at an early age to give your money enough time to compound.

Steps to max out 401(k)

If you want to max out your 401(k) contributions, here are key strategies that you can use to max out your 401(k):

Max out employer contributions

If your employer has a 401(k) matching program, you should contribute as much to take advantage of that match. An employer may require employees to make a minimum contribution before they can match their contributions.

For example, if your employer offers dollar-for-dollar matching up to 6% of salary, you should take full advantage to get the match. After all, you are getting free money from your employer. Each company has different rules for matching contributions, and you should review the company’s 401(k) matching policy to know the rules.

If you have not maxed out the matching contributions, you can increase your 401(k) contributions to take full advantage of the 401(k) match.

Max out salary-deferred contributions

Apart from maxing you’re your employer contributions, you should also contribute enough money for your retirement. If you are below 50, you can contribute up to 2022 is $20,500. Employees above 50 can contribute up to $27,000 in 2022.

A 401(k) is funded with pre-tax dollars, and this means you do not pay taxes on the 401(k) contributions. Instead, you get a tax break in the tax year when you contribute.

Increase your contributions

If you have not changed your 401(k) contributions recently, you should evaluate your budget to know if you can boost your retirement contributions. Most employers allow 401(k) participants to adjust their 401(k) contributions several times each year.

If you have a limited budget, you can set up an automatic increase each year until you achieve the target contribution. For example, if you contribute 10% of your paycheck, you can increase your contributions by 1% each year until you reach 15% of your pay.

What to do after maxing out your 401(k)?

Once you max out your contributions, you may be wondering, what next? Here are alternative options you can use to supplement your 401(k) retirement savings:

Individual Retirement Account

Once you have maxed out your 401(k) contributions, the first option you should consider is an IRA. You can choose either a traditional IRA or Roth IRA.

If you have a traditional IRA, you can delay paying taxes on contributions until you withdraw money in retirement. However, if you have a Roth IRA, you will pay taxes on contributions, but withdrawals in retirement will be tax-free.

In 2022, individuals can contribute a maximum of $6,000 to a traditional or Roth IRA, or $7000 for those above age 50.

Health Savings Account

If you have extra funds remaining after maxing out your 401(k), you can contribute to a health service account (HSA). You can use the funds in the HSA to pay for eligible health costs like copayments, deductibles, and coinsurance.

If you don't need the funds to pay for out-of-pocket health costs, you can leave the funds in the HSA and let it grow. Once you reach age 65, you can take tax-free distributions to pay for qualified medical expenses. However, you will pay taxes if you use the funds to pay for non-qualified expenses.

In 2022, you can contribute up to $3,650 to an HSA as an individual, or $7,300 for family coverage.

Create a brokerage account

You can also open a brokerage account with a financial institution that can allow you to trade securities. Some brokerage firms may require investors to have a certain minimum balance to trade securities. You will earn interest and dividends on the securities you trade in the account.