A common retirement question we often hear is, “should I contribute the maximum in my 401(k) account?”
You might already know that the current annual limit for your 401(k) is $18,000 (or $24,000 if you’re 50 or older). And no doubt you are taking advantage of whatever match your employer provides, be it up to 6%, a dollar for dollar match or something else.
But what is the best way to max out your 401(k)? Is it smart to always contribute the annual limit if you can?
Many financial professionals recommend you contribute as much as you can into your retirement accounts. This is recommended as good rule of thumb to ensure that you to save for your future. If you have an automatic paycheck deduction to your retirement account, you won’t be inclined to spend that money.
But a more definitive reason is that a 401(k) is a tax deductible account, more specifically tax deferred. You pay less in taxes immediately and your income has a longer time to grow before being taxed again. The benefit of letting your money grow over time before being affected by tax policy will leave you with a larger sum to be taxed when you finally get to use the account.
That being said, you should not make all your decisions just off tax benefits. Some experts recommend that you limit your contributions to the amount that your employer is willing to match. It’s highly unlikely that the amount you pay in administration fees and taxes will offset the benefit of the employer contribution.
As you grow your retirement savings, it is highly important to have an emergency fund of money for yourself as well. This is usually advised to be about six months of living expenses. In addition, if you are trying to make big purchases in the near future, like buying a house or a car, contributing high amounts to your 401(k) isn’t the best way to save.
Thinking about your specific situation and your financial goals is important when planning for your retirement. Thinking about your retirement early is a great habit to have and maintain, but it might not always be wise to let that be your only focus when creating a savings plan for your family.
Schedule a portfolio review with Miramontes Capital today to discuss how we can help you achieve your meaningful life through retirement planning.