It can be challenging to reach the maximum contribution limit for a 401(k). but there are ways to achieve this goal. Many individuals prefer 401(k) accounts over IRAs for a specific reason: the potential for receiving employer matching contributions, which can result in ‘free money.’ Additionally, 401(k) plans typically offer higher annual contribution limits compared to IRAs, allowing you to save more for retirement in a tax-advantaged manner.
Contribution limits
For the current year, 401(k) contribution limits are set at $22,500 for individuals under 50 and $30,000 for those aged 50 and above. In contrast, individuals under 50 may contribute up to $6,500 to their IRA, and those over age 50 and over can contribute up to $7,500. Despite these higher limits, a recent CNBC survey found that only 11% of savers manage to maximize their 401(k) contributions.
Given the higher limits involved, this statistic is understandable. However, fully funding a 401(k) can significantly benefit your future financial security. If your goal is to achieve this milestone, consider implementing some smart strategies.
Making Sacrifices When Necessary
While some financial experts suggest cutting back on minor indulgences like store-bought coffee and takeout meals to boost your retirement savings, realistically, these cutbacks alone won’t enable you to reach the annual contribution limits of $22,500 or $30,000 for a 401(k).
If you are already close to the maximum contribution levels, reducing daily expenses like coffee shop visits might nudge you closer to your goal. However, if your overall financial situation only allows for a $5,000 annual contribution to your 401(k), brewing coffee at home won’t bridge the gap to $22,500 or $30,000. Similarly, giving up a weekly takeout order, canceling a gym membership, or trimming other modest expenses won’t suffice either.
To position yourself to maximize your 401(k) contributions, especially if you aren’t a high earner, focus on controlling your major expenditures. This entails avoiding a substantial mortgage and minimizing car-related expenses instead of committing to a hefty $900 monthly car payment.
Setting Priorities
Living in a smaller home or driving a less luxurious car may not appeal to everyone, and that’s perfectly acceptable as long as you are committed to saving a significant portion of your income for retirement. Maximizing your 401(k) contributions is just one option among many.
Remember, if this is your objective, you must prioritize keeping your more considerable expenses, such as housing and transportation, in check. By reducing your monthly mortgage from $2,700 to a more manageable $1,200 and opting for a $525 car payment over $900, you free up $1,875 each month – the amount needed to max out a 401(k) if you’re under 50.
Getting a Part-time Job or Finding a Side Hustle
Think about finding a part-time job or starting a side hustle. Bringing in an additional stream of income can allow you to add more money to your current 401(k). By increasing your cash flow, you have more income that you can contribute to your present plan.
Consider a Solo 401(k)
If you don’t have access to these plans, consider opening a business, especially if you already have a side hustle or are considering one. If you are self-employed and have no employees, you are eligible to open a solo 401(k). This applies to couples who jointly run a business as well. As both an employer and an employee, you can make contributions to your solo 401(k). You have the option of selecting either a traditional or a Roth plan. The money that you are generating from your side hustle (your company) can go to your solo 401(K).
Ultimately, it’s about making choices that align with your financial goals. Whether you choose to maximize your 401(k) contributions or not, maintaining control over your significant expenses will undoubtedly benefit your future financial well-being.
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