Maximizing Your 401(k) Is a Huge Reward for Your Future Self

Let’s get real: Setting aside money in tax-deferred accounts like 401(k)s and IRAs can be easy to talk yourself out of, but it can be key to building your retirement savings. Trust us, your future self will thank you for reading this.

Tax-deferred retirement accounts give savers an important advantage. Typically when you sell stocks or other investments, you have to pay taxes on any gains. But with a 401(k) and traditional IRA, you don’t pay taxes on any investment gains — or your contributions — until you withdraw your money (usually once you reach retirement age). This means more money has the chance to grow over time. Plus, you reduce your taxable income, which can cut down on what you owe come tax season.

If you can swing it, the best way to capitalize on the tax advantages of these types of accounts is to contribute as much as the IRS allows. For 2025, the limit on 401(k) contributions is going up to $23,500 — $500 more than this year — while the cap on IRAs will continue to be $7,000, the IRS announced earlier this month.

Now, a $500 increase in the IRS limit (which is fairly typical for recent years) may not seem like a lot, but even a modest amount can have a surprising impact. If you invested $20,000 today and let it sit untouched, 20 years from now you’d have $128,564, assuming the average annual stock market return of 9.75%. But if you contributed just an additional $500 in each of those 20 years, you’d bring that total to about $156,000.

So what? Tax-advantaged savings accounts can make a huge difference in reaching your retirement savings goals, even if contributing the maximum isn’t realistic for your budget. (If that’s you, you’re not alone: Last year, only 14% of Americans maxed out their 401(k)s, according to Vanguard.) Every dollar you stash away has the potential for future growth, so do what you can.

photocredits: iStock/shapecharge

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