I know – it’s boring. Even the name doesn’t even sound all that great.
But little do you know … NOT saving enough in your 401k plan could be the very thing that unravels your very financial well being?
It’s okay. Don’t believe me. But it’s true.
You see – every year the IRS puts a limit on just how much your max 401k contribution for the year can be. In 2014 it is $17,500. And would you like to know what happens if you don’t reach that upper limit?
- You’ll be passing up a lot of money
- Your hair will fall out
- The Martians will come for you
Ok, maybe we’re being a little dramatic. Perhaps only one of those things is actually going to happen (can you guess which one?)
But truthfully – if you don’t want to sabotage your finances, then you really should make every effort to maximize your 401k contributions if you haven’t already. You probably have no idea just how much fortune you actually could build if you take full advantage of it!
Let’s take a closer look at just what that means:
Why You Really Need to Reach Your Max 401k Contribution Limit:
Let’s say you can make one of two choices:
- You can be a chump and contribute only $100 per paycheck ($2,600 per year) to your 401k plan every year. Why? Because for some reason you think you’ve got better stuff to spend your money on.
- You can be awesome and contribute the full $17,500 to your 401k. It may be painful, but you’ll see what the reward will be.
If you continue diligently on this path and continue to earn about 8% every year, how much more money will you have in your account if you’re awesome versus being a chump?
Unreal! That’s an account balance of $294,356 versus $1,982,456. Can you imagine how nice of a retirement you’ll have if you’ve got a safety net of two-million dollars?
Doesn’t it pay to be awesome?
Unfortunately the guy contributing only $100 to his 401k every paycheck has become an all too common reality for a lot of Americans. In recent studies, the average retirement savings for most people was pretty pathetic. It was only around $80,000 in total.
If you think $80K is enough to retire, think again! You’ll blow through that in less than 5 years.
And then it will be right back to work for you – enslaving yourself to a job you don’t want to have. Is that what you really want for yourself?
Be awesome then!
Getting Your Employer Contribution:
Another reason to hit the maximum 401k contribution limit every year: It guarantees that you’ll get as much as possible from your employer.
Most places of work usually have some kind of 401k employer matching program where they put in a certain amount of money into your savings plan as an incentive to save more for retirement.
For example: The most common type is to receive 50% on the first 6% of your gross pay. So if you make $60,000, then 6% would be $3,600, and your employer would contribute 50% of that ($1,800) to your plan. That’s not bad at all simply for simply saving your money!
Though you don’t necessarily have to reach the max contribution limit, it does help to ensure that you’ll get the maximum amount from your employer if you do!
Pulling One Over the Tax Man:
Do you like paying taxes? I know I sure don’t. I’d much rather keep my money.
One of the big aspects that most people don’t really realize about contributing to their 401k plans is how much you’re actually saving yourself in taxes up-front.
The way that works is that everyone is in a particular tax bracket depending on how much money they actually make. If you’re like most average Americans, then you’re probably in the 25% tax bracket.
So let’s look at how our 2 scenarios above and see how much we’re really saving in taxes:
- $2,600 x 25% = $650
- $17,500 x 25% = $4,375
Wow! That means you’re saving $3,725 in taxes every year by taking full advantage of your right to save the max 401k contribution limit. Wouldn’t you rather hang on to $3,725 of your money every year instead of sending it to the IRS?
Again, it pays to know what this limit is and then exploit it to its full potential. All that it means for you is more and more money straight into your pocket! And that’s not a bad deal …
Are you saving like a chump or being awesome when it comes to your 401k plan?
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