How to Max Out Your 401K

One of the more common investment vehicles available to workers is the 401(k) plan. As of 2019, employees can invest up to $19,000 in a 401(k) plan. Those who have reached at least 50 years of age can contribute $6,000 in catch-up contributions for a total of $25,000. This is admittedly a pretty high figure for many families to hit. The average household in the US makes around $60,000 a year. However, this does not mean that it’s impossible to max out your 401(k) and there are some benefits to doing so.

 

Many Employers Match Contributions

 

Employee contributions are not the only way to put money into a 401(k) plan. Many employers will match the amount their employees contribute. A common level of matching is 100% for the first 6% of an employee’s salary. Therefore, if you decide to save up to the match and you make a common salary like $50,000, you’d contribute $3,000 toward your retirement fund. If your employer matches the first 6% of your salary, you’d get another $3,000. Any matching contributions contributed by an employer are effectively an automatic return on your investment. It’s free money that your employer has budgeted so it only makes sense to take advantage of the opportunity.

 

Contributions Provide Tax Benefits

 

There are tax benefits that come with saving in a 401(k) plan. Most contributions are made on a pre-tax basis. Given a modest salary of $50,000, it’s likely that a single person or a married couple with no kids would be in the 12% tax bracket. The $3,000 contribution referenced above would cut your tax bill by $360. The amount of the tax reduction would be equal to the marginal rate on your contributions. At higher incomes, you’d save more on taxes in the current year. Your contributions then grow tax-free until you withdraw them, ideally after age 59 1/2.

 

Take on a Side Hustle

 

Admittedly, it can be difficult to max out a 401(k) on a salary of $50,000 or $60,000. This would equal around 30% to 40% of your gross income. Taking on a side hustle that you work during evenings or weekends could fill the gap and allow you to save more for retirement. Depending upon the income you could bring in, it might be possible to build up to $19,000 in annual contributions.

 

Save Raises

 

Another option that can help you max out your 401(k) contributions is saving any raises you might get. If you can keep from increasing your spending, any raise could go into the 401(k) plan. Over time, you will get closer to maxing out your contributions. It will take discipline and dedication, but the more you can save now, the more money you’ll have available for your golden years