After a lifetime of hard work, retirement is seen by many as the ultimate reward. The thought of spending the latter part of your life doing the things you love and enjoying quality time with your friends and family may seem like a far-off dream. But a very cool dream, nevertheless.
For many of us, to be able to have the retirement we’ve been imagining, saving and investing begins now. There are a number of retirement accounts that allow you to save and invest toward your retirement goals, but one of the most common in the U.S. is the 401k.
As of this past fall, 401k plans in the U.S. held an approximate $5.6 trillion in retirement assets. A 401k is an employer-sponsored retirement account that allows both you and your employer to make contributions. The money is then typically invested in mutual funds that are made up of stocks, bonds, and money market investments.
You can opt to have a certain amount of your paycheck go directly into your 401k and sometimes your employer will match your contributions up to a certain percentage or dollar amount. When you set up a 401k, you need to decide how much you want to contribute, what kind of investments makes sense for you, and what type of contributions you will make.
With a pre-tax 401k contribution you don’t have to pay tax at the time of contribution. You do pay tax when you withdraw the money at retirement. You also may pay penalties if you withdraw money before the age of 59 ½.
With a Roth contribution, you pay the taxes up front when you make your contributions and you are able to withdraw the money tax-free in retirement.
As you’re working toward your retirement goals you likely want to make the most of your 401k and IRA contributions. You may even be interested in figuring out how to max out your 401k? Regardless of what your retirement goals are, SoFi can help you get your money right with automated investing.
How to Max Out 401k
For 2019, the 401k contribution limit is $19,000 in salary deferrals. If you’re over the age of 50, you can contribute an additional $6,000 in catch-up contributions.
Yet, most people don’t know how to max out the 401k. According to a Vanguard study , only 13% of plan participants managed to max out their 401k in 2017. Should you max out your 401k and how? Here are some strategies on how to max out your 401k and if it’s right for your retirement plans.
Maxing Out 401k Employer Contributions
Your employer may offer matching contributions, and if so there are typically rules you will need to follow to take advantage of their match. For example, they might require a minimum contribution from you before they’ll match it, or they might match up to a certain amount. Each company will have their own rules for matching contributions, so review your company’s policy for specifics.
Take advantage of your employer’s match and contribute as much as you can to max it out. Every penny helps when saving for retirement and you don’t want to miss out on free money that your employer offers in the form of a match.
Making Use of Your Catch-Up Contributions
If you’re over 50, you can contribute an additional $6,000 for a total of $25,000 for the year. Even though you’re closer to retirement, catch-up contributions can make a difference. The average 401k balance for someone in their 50s was $152,700 in 2017.
While that’s a decent amount, it’s most likely not enough to get you through your entire retirement. To see how much money you should have saved away, take a look at SoFi’s retirement calculator.
Resetting Your Automatic 401k Contributions
When was the last time you reviewed your 401k? It may be time to check in and make sure your retirement savings goals are still on track. Is the amount you originally set to contribute each paycheck still the correct amount to help you reach those goals?
With the increase in contribution limits this year, it may be worth reviewing your budget to see if you can up you contribution amount to max out your 401k. And if you don’t have automatic payroll contributions set up, then you could set them up.
It’s easier to save money when it’s automatic deducted; you’re less likely to spend it when it never hits your checking account in the first place.
Using Bonus or Extra Money to Save For Your Retirement
Yes, it can be difficult to put more money into retirement savings when retirement seems like a long way off. That’s why it might make sense to use any windfall you come into to save—whether for retirement or another financial goal.
The extra money shouldn’t be factored into your spending, regular expenses, and bills. Consider possibly redirecting part of your bonus or any raise you get into your 401k contributions, or potentially into another retirement account, like an online IRA.
Maximizing Your 401k Returns and Fees
Are you getting the most for your fees? Most people don’t know what they’re paying in 401k fees. The average fees for large 401k plans is below 1%, but small plans can have average fees that are much higher. Fees add up—even if your employer is potentially paying the fees, you’ll have to pay them if you leave the job and keep the 401k.
Make sure you’re getting the most for your money in order to get the maximum out of your retirement savings. If you are currently working for the company, you could discuss high fees with your HR team, but if you are no longer working there you might consider moving your old 401k into a plan that has lower fees.
It’s also worth examining what kind of fund you’re invested in and if it’s meeting your financial goals and risk tolerance.
Should You Max Out Your 401k?
Even if you know how to max out your 401k savings, you have to ask: Should you?
Saving for retirement is an important financial goal and most Americans aren’t saving enough, but it’s not the only goal and a 401k is not the only way to achieve it. While you may want to take full advantage of any tax and employer benefits that come with your 401k, you also want to consider other retirement plans and their benefits.
The first thing is to consider any other financial commitments you have: High-interest debt (like credit card debt) should be paid off so it doesn’t accrue additional interest and fees. You likely also want to build up an emergency fund.
And you probably have additional bills, like student loans, health insurance, and rent. After making sure you’re able to meet your financial obligations, you want to consider what financial goals you want to save towards.
Retirement is important and most financial advisors would suggest maxing out any employer match contributions. But after that, you might also have other goals you’re saving for: buying a house or a kid’s college fund.
And if you do decide to use extra funds to save for retirement, you might want to consider other retirement account options if they have lower fees, more investment options, or possibly manage the money for you if you want to take a hands-off approach.
Rolling Over a 401k
If you have an old 401k, you have options. You may want to consider rolling it over into an IRA. When you leave a job, you typically have the option of keeping the 401k and paying the fees, cashing it out and paying a penalty, rolling it over to your new plan, or rolling it over into an individual retirement account (IRA).
SoFi allows you to roll over an existing retirement account, whether an existing IRA or 401k, into an IRA with SoFi Invest. Automated investing with SoFi Invest takes the stress out of investing by helping you set goals, rebalance, and diversify your money all without charging a management fee. SoFi offers traditional, Roth, and SEP IRA accounts—all with no management fees.
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