You’ve worked hard for your money, but if you’re like most people, you haven’t saved enough to live on in retirement. After all, amidst the hustle and bustle of work and daily life, it’s easy to fall behind on your retirement saving.
However, there are strategies to fix up your savings and start planning for the retirement of your dreams.
Keep reading to find out 5 easy steps to follow when you need to catch up on your 401k.
1. Know your plan
401k plans may seem intricate on the surface, but as long as you keep a few key factors in mind, you’ll be in for smooth sailing. First, it’s important to know which type of 401k plan you have.
The two types are traditional and Roth 401k’s.
For a traditional 401k, employee contributions are made from your gross income and income taxes are deferred on that money until it’s is withdrawn from the 401k, which usually happens after retirement.
In a Roth 401k, employee contributions are made from your net income (after tax). This means that, unlike a traditional 401k, it will not be taxed upon withdrawal in the future. That money is tax free, baby!
Second, you’ll want to keep an eye on contribution limits.
Each year, the IRS releases a set of updated annual contribution limits to account for cost of living. In 2021, the annual contribution limit for employees under the age of 50 is $19,500 per year and $26,000 per year for those who are 50 and up.
Since this number is subject to change every year, you may need to adjust your contributions annually to make sure you’re getting the most out of your 401k.
The final detail of your plan to keep in mind is company match.
There are a variety of options when it comes to how much your employer is willing to contribute to your 401k each year. They may match 50 cents for each dollar or even dollar for dollar, depending on their policies. But, you should always aim to figure your contributions so that you are receiving your full company match.
For example, if your employer offers a 6% match, you should aim for 6% contributions as well.
2. Max it out
As mentioned above, the contribution limit for employees under 50 in 2021 is $19,500.
In order to max out your 401k and build your retirement accounts up as much as possible, you need to adjust the percentage of your annual contribution to hit that $19,500 cap.
Depending on your own personal income, the actual percentage will vary, but try to aim for that maximum contribution.
To calculate your contributions to ensure you’re maxing out your traditional 401k plan, divide $19,500 by the number of pay periods you have in a year.
For example, if your gross salary is $125,000 and you have 26 pay periods a year (paid every other week) you’ll contribute $750 a paycheck or 15.6% of your salary.
3. Make a catch-up contribution
Once you hit 50, you will become eligible to make catch up contributions.
This is especially helpful for anyone who feels like they have fallen behind on saving for retirement.
The maximum amount for catch up contributions in 2021 is $6,500, making the total contribution cap $26,000.
Again, try to adjust your contribution percentage to reach that maximum and give your retirement income a big boost.
4. Choose low fee funds
As you probably already know, a 401k can’t come without fees.
The expense ratio is a fee charged to you as a percentage of your assets. The most common expense ratio percentage is 1% ($1,000 for every $100,000), which may not seem like much once a year, but it will add up and can greatly affect your savings in the future.
Take a look at this calculator from Nerdwallet.com to see how much you’ll pay in fees over the course of 20 years starting in your 401k if you choose one of the expensive funds!
I don’t know about you, but I refuse to pay $170k in fees – that’s your money!
The best way to avoid letting fees ruin your early retirement plans is to look for low cost index funds.
Vanguard offers index funds with an expense ratio of just $0.04%, a drastic reduction compared to the typical 1%.
5. Invest outside your 401k
You can never have too much banked up for retirement, right? By investing your extra cash outside your 401k, you can build your retirement savings even more.
One way to do this is by opening a Roth IRA. A Roth IRA is a retirement account that works in a similar way to the Roth 401k – your contributions are made after taxes, meaning they can’t be taxed in the future upon withdrawal.
The IRS dictates maximum annual contributions for Roth IRAs as well, with the maximums for 2021 sitting at $6,000 for those under 50 and $7,000 for anyone aged 50 and up.
Try to hit those maximums just as you would when contributing to your 401k. Plenty of brokerages like Fidelity and Vanguard offer Roth IRAs, so check out all your options and select the one that works best for you.
Feeling like a 401k expert yet? You should be! Make your future self happy by keeping these 5 steps in mind as you continue to contribute to your 401k in the coming years.
What is the catch up 401k contribution for 2021?
$6,500 is the catch up contribution for those age 50 and over in 2021 bringing the total contribution to $26,000 for the year.
Who is eligible for the 401k catch up?
Anyone age 50 or over is eligible for the extra catch up contribution of $6,500.
Should I make catch up contributions to my 401k?
Yes, after you have maxed out your Roth IRA. A simple plan is 1) contribute the max of $19,500 to your 401k, 2) contribute $7,000 to max out your Roth IRA, 3) then make the $6,500 catch up contribution to your 401k.