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How to Max Out Your 401(k) Contributions

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If you work for an employer who offers a 401(k) plan, this can be one of the most advantageous retirement savings plans to use. You have a powerful tool for retirement savings at your disposal. To truly leverage this advantage, it’s crucial to max out your 401(k) contributions. 401(k) plans come with high contribution limits, significant tax advantages, and potential employer matches. By ensuring you max out your 401(k), you can fully capitalize on these benefits and enhance your retirement savings strategy.

Understanding 401(k) Contributions

A 401(k) plan is a tax-advantaged retirement savings plan sponsored by an employer. It allows employees to save and invest a portion of their paycheck before taxes are taken out (or after if a Roth plan). 

Most employees set up contributions so that a portion of each paycheck goes directly into their 401(k), but it’s possible to make periodic or one-time contributions too. Additional occasional contributions might help you max out your contribution limit.

2024 401(k) Contribution Limits

401(k) plans are subject to two separate contribution limits. There’s an employee contribution limit, and a combined contribution limit:

  • Employee Contribution Limit: The maximum amount an employee is allowed to contribute themselves. This is the contribution limit that you can “max out.”
  • Combined Contribution Limit: The maximum amount that can be contributed, counting both employee and employer contributions. Whether you’ll reach this max depends on your own contributions and your employer’s matching program. 

For 2024, the employee contribution limit is $23,000 and the combined contribution limit is $69,000. 

These don’t include an additional $7,500 “catch-up” allowance available to those 50 or older. With the catchup, the 2024 maximum employee contribution is $30,500 and the maximum combined is $67,500 if you’re at least 50.

Benefits of Maxing Out Your 401(k)

401(k) plans offer several advantages regardless of how little or much you put into them. The more you contribute, however, the more you’ll benefit from these advantages. Maxing out your 401(k) contributions will max out your benefits from the plan.

Employer Matching

Many employers offer a match to your 401(k) contributions, up to a certain percentage of your salary. A match may be the same as your contribution, a portion of your contribution, or even possibly more than you contribute with some employers.

For example, an employer might offer a 100% match on contributions up to 3% of your salary. If you earn $80,000 a year, the match could be worth $2,400 annually ($80,000 x 3% x 100%). That’d increase to $6,400 if the match was 200%, and up to 4% of salary. Even if it was smaller, any employer contribution is a nice addition to your 401(k).

An employer match is sometimes referred to as “free money,” because you don’t have to do anything but contribute. It’s a primary reason to at least max out your employer’s match if you’re able to. Maxing out a match is often doable, and takes full advantage of one of a 401(k) plan’s best features (if a match is offered by your employer).

All 401(k) plans offer substantial tax advantages, either in the form of deferred taxes or untaxed growth. Which advantages yours offers depends on the type of plan.

Contributions to a Traditional 401(k) are made pre-tax, which means they reduce your taxable income in the year that they’re made. Reducing your taxable income reduces your income tax liability, and could put you in a lower tax bracket depending on your income level and contribution amount. 

Withdrawals during retirement are taxable as income, but you might be in a lower income tax bracket then. Deferring taxes also allows you to invest more, potentially increasing returns and compound growth.

Contributions to a Roth 401(k) are post-tax, meaning they’re taxed as income when you make them. After this tax payment, however, they may grow tax-free. Withdrawals generally aren’t taxed during retirement.

Although you’ll initially have a lower amount to invest with a Roth plan, the tax-free growth can exceed the benefits that a Traditional plan offers. 

The Roth 401(k) was created in 2023, and not all employers offer a Roth option yet. Whether you have access to a Traditional or a Roth 401(k) plan, maxing it out will yield major tax savings.

Compound Growth Over Time

The power of compounding cannot be overstated. Albert Einstein referred to it as the “eighth wonder of the world,” and Warren Buffet attributes much of his success to it.

Compound growth works by potentially generating earnings on past earnings. Over decades, compounding growth might increase your investment to much more than what you’ve actually contributed to the account. (Returns are not guaranteed, as all investments carry risk of loss.)

The factor that can have the greatest impact on compound growth is simply time. The longer your investments grow, the more earnings might compound on past earnings. This is the primary reason to start contributing to your 401(k) now, and hopefully max it out early on in your career. 

Strategies for Maximizing Your 401(k) Contributions

1. Increase Contribution Rates

The most straightforward way to maximize your 401(k) contributions is simply to contribute more on a regular basis. Even a nominal increase in how much is withdrawn from your paycheck could get you closer to maxing out the account. 

If you contribute an additional $50 per paycheck and are paid weekly, that would add up to $1,560 annually. $1,560 might not seem like too much, but it’s more than 6% of the 2024 employee contribution limit. 

If maxing out your contributions feels daunting, start by gradually increasing your contribution rate. Consider increasing it by 1% per year. In a few years, you’ll be contributing substantially more than you are now.

2. Live Below Your Means

Living below your means will give you more to save for retirement, which is additional funds that could be contributed to your 401(k) plan. 

Evaluate your monthly budget (draft one if you don’t already have a budget!). Can you decrease dining out, vacation spending, subscriptions, or other discretionary expenses? Maybe there’s a way to reduce home maintenance costs by doing more yardwork or basic repairs yourself.

3. Contribute Bonuses and Raises

Instead of spending windfalls from your work, use bonuses to fund your 401(k). This can be especially effective if you aren’t guaranteed a bonus, and thus shouldn’t plan on it for personal spending. If you aren’t planning to spend a bonus, you can put it toward your savings.

You can do likewise with any raises that come. Using a raise to increase your 401(k) contributions can be a significant boost. Just a 3% annual raise on an $80,000 salary would be another $2,400 in your 401(k), or about 10% of the 2024 employee contribution limit.

Essentially, avoid lifestyle creep when you receive a bonus or raise. If you want to use the additional windfall to increase lifestyle now, at least set aside a portion of the additional income toward your 401(k). You might spend half and save half, or use some other ratio. It’s best to have the ratio decided before the additional income is received.

4. Consider After-Tax Contributions

If your employer’s plan allows, making after-tax contributions beyond the standard pre-tax limits can be a powerful way to increase your retirement savings. Although these contributions won’t reduce your taxable income today, they can grow in your account and increase compound growth.

After ending your current employment, a financial advisor might be able to help you roll your 401(k) into a Roth IRA. Funds in a Roth IRA grow tax-free, and withdrawals are untaxed during retirement. Making after-tax contributions could let you roll over much more.

(After-tax contributions aren’t always allowed, and rolling over is something that a financial advisor should help evaluate and execute.)

Should You Max Out Your 401(k)?

While maxing out your 401(k) is generally beneficial, it’s important to consider your overall financial situation. Such a major financial decision requires personalized evaluation.

In general, you probably should pay off high-interest debt and have an emergency fund first. There also might be other retirement plans, such as an IRA, to consider. You could have other particular considerations that impact this decision.

A knowledgeable financial advisor can help you evaluate this and other financial options. They’ll be able to guide you through the decision, reviewing your particular financial situation and savings options. You can make an informed decision about your 401(k) after a thorough evaluation.

Consult A Financial Advisor

Ready to take control of your retirement planning? Use our free advisor match tool to connect with a qualified financial advisor who understands your unique needs and goals. They can help you create a comprehensive retirement plan, including optimizing your 401(k) contributions and other strategies. Together, you can build a stable financial future and enjoy your non-working years to the fullest.

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