How To Max Out Your 401(k): A Step-by-Step Guide

A traditional IRA offers tax benefits

Maxing out your 401(k) means setting aside the maximum limit into your dedicated workplace retirement account within a single year. If you have the space in your budget to max out this type of account, you can push closer to your retirement goals.

Here’s how to max out your 401(k) in this full guide.

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What Is The Annual 401(k) Contribution Limit For 2024?

If you have access to a 401(k) retirement account through your employer, the annual contribution limit is $23,000 in 2024. This limit also applies for 403(b), the Thrift Savings Plan and most 457 plans. For employees aged 50 and over, the catch-up contribution limit is $7,500 for 2024. With that eligible employees age 50 and over can contribute a maximum of $30,500 to their 401(k).

Notably, the amount you can contribute is tied to your salary, meaning you can only contribute a maximum of 100% of your salary. For example, if you earned $10,000 a year, the maximum you could theoretically contribute to your 401(k) for that year would be $10,000.

How Much Should You Contribute To Your 401(k)?

Most retirement experts recommend contributing somewhere between 10% to 20% of your salary to your 401(k). That’s a big range. And the reality is that the amount you should contribute varies dramatically based on your situation.

For example, if you have the goal of retiring early, then maxing out your 401(k) can accelerate your progress. If you are having trouble making ends meet but don’t want to neglect saving for retirement, then contributing at least enough to snag any matching contributions offered by your employer is ideal. Utlimately, you’ll need to decide what makes sense for your situation. If you want support, you can work with a financial advisor to map out your retirement goals and determine how much you should contribute to your 401(k).

What Financial Goals To Hit Before Maxing Out Your 401(k)

Maxing out your 401(k) is an admirable goal. While the concept of saving heavily for retirement is usually a good idea, you should also make sure you hit some other financial goals before going full steam ahead with your retirement savings. Below are some financial goals that you might want to hit before funneling your funds to max out your 401(k).

• Pay off high interest debt: If you have high interest debt, like credit card debt, paying it off should remain your priority. Once you pay off your high-interest debt, you can reallocate your funds to hit other financial goals, like saving for retirement in a 401(k).
• Build an emergency fund: An emergency fund offers financial stability when life throws unexpected expenses your way. Most experts recommend stashing between three to six months’ worth of expenses in an emergency fund. While you don’t necessarily need to fully stock your emergency fund before saving for retirement, you might decide it’s a priority over pushing your 401(k) contributions to the limit.
• Basic costs: You’ll need to have enough money in your budget left over to cover other basic costs. For example, you shouldn’t max out your 401(k) at the expense of not being able to pay for your rent or health insurance.
• Other savings goals: Retirement is a big savings goal. But it’s not the only one to keep in mind. In addition to contributing to your 401(k), you might also be saving for large purchases like a home or vehicle. As you try to strike a balance between your multiple savings goals, you might decide to skip maxing out your 401(k).

Remember, tucking money away into your 401(k) isn’t an all or nothing thing. Depending on how much money you have available to allocate toward your financial goals, you might not have enough room in your budget to max out your 401(k). And that’s okay! If possible, do your best to get any matching contributions from your employer for now. As your expenses change, make adjustments to increase your 401(k) savings. For example, if you pay off your credit card debt, consider funneling that monthly payment toward your 401(k).

How To Max Out Your 401(k): Step by Step

If you want to max out your 401(k), start by determining how much you need to set aside. For most, you’ll need to contribute $23,000 to your 401(k) to hit the max. But for those aged 50 and over, you can contribute an additional $7,500 in catch up contributions. Once you know how much you need to hit the max, it’s time to start saving.

1. Hit Your Employer Match Contributions Max

If your employer offers a matching contribution, start there. In general, employers tend to have rules attached to their matching contributions.

For example, you might need to contribute a minimum amount before your employer kicks in the match. Or your employer might only match your contributions up to a particular amount. Make sure to read your company’s fine print to understand the rules of getting your match, if your employer offers one at all.

With a clear understanding of the rules, contribute enough to get the maximum match. For example, say your employer will match your contributions for up to 4% of your salary. If you contribute 4% of your salary, your employer will also contribute 4% of your salary. With that match, the total contributions to your 401(k) equal 8% of your salary.

Even if you cannot max out your entire 401(k), it’s a good idea to take advantage of your employer’s matching contributions. If you don’t contribute enough to get the full match, it’s like you are leaving money on the table.

2. Ramp Up Your Salary-Deferred Contributions

Once you’ve lock in your employer’s matching contributions, it’s time to ramp up your salary-deferred contributions. This contribution is called a “salary deferral” because you are putting the funds into your 401(k) to access in retirement. Plus, the funds you contribute are made with pre-tax dollars, which means your taxable income for the contribution year is lower.

You’ll need to run the numbers to determine how much of your salary you’ll need to defer to max out your 401(k). For example, let’s say your salary is $100,000 per year for easy math. If your employer offers a match of 4%, which you get, you’ll have $8,000 in your 401(k) for the year. When you subtract $8,000 from $23,000, you’ll need to contribute an additional $15,000 to hit the max, which works out to $1,250 per month.

Once you know how much you’ll need to contribute to hit the max, you’ll be able to factor that number into your budget.

3. Make Any Catch-Up Contributions You Qualify For

For savers age 50 and over, you have the option to make catch up contributions.

In 2024, savers age 50 and over can contribute an additional $7,500 to their 401(k). That works out to $625 per month.

If you are eligible to make catch-up contributions and have the bandwidth to save even more, then adjust your numbers to contribute a total of $30,500 to your 401(k) in 2024.

4. Make It Automatic

The decision to set aside money in your 401(k) each and every month can be a challenge. After all, you’ll have to choose between saving the funds or using them for a current expense. Luckily, you can remove the temptation of spending funds intended for your 401(k) by automating the transaction.

Take a look at the numbers to determine how much you need to save with each paycheck. From there, you’ll need to set up the automatic option by either working with your HR department or updating your preferences with your 401(k) provider.

Importantly, make sure to update your automated system once each year. The 401(k) annual contributions limits can change from year to year, as can your capacity for saving. A regular review will ensure that your automated 401(k) savings are on track.

Will My 401(k) Automatically Stop At The Limit?

Whether or not your automatic contributions will automatically stop at the annual contribution limit vary based on your employer and 401(k) provider. In most cases, there are measures in place to prevent you from automatically contributing more than the limit.

But it’s worth noting that a technical glitch or inadequate system could mean that your 401(k) contributions don’t automatically stop at the limit.

What Happens if I Contribute Too Much to My 401(k)?

If you overcontribute to your 401(k), notify your employer and the plan administrator when you spot the error. The overcontribution will be returned to you. It can take some time to process the issue. But generally, the funds will be returned to you by April 15. With that, you can report the funds as taxable income for the year.

Take a minute to check for 401(k) over contributions each year. If you catch it before tax time, it can be easily sorted out. Of course, it can be sorted out any time. But it’s easier if the tax filing deadline for the year in question hasn’t passed.

5. Funnel Bonuses To Your 401(k)

If you receive a bonus, you might be able to funnel a portion of those funds directly into your 401(k). While this means you’ll have to wait for a bonus to move forward with stacking up your 401(k), it’s a viable way to hit your 401(k) annual contribution limit.

6. Optimize Your 401(k) Investment Portfolio

As you contribute to your 401(k), make sure that the funds are used to create an investment portfolio that matches your goals. Start by looking at the fees, you’ll want to keep your funds in places that have as few fees as possible.

Ideally, your employer-sponsored plan will offer an option to invest in low cost index funds, which can help you build a diversified portfolio.

Can I Contribute to an IRA After Maxing out My 401(K)?

Yes, it’s entirely possible to contribute to an IRA after maxing out your 401(k). Of course, this assumes you have room in your budget leftover to contribute to an IRA after putting at least $23,000 into your 401(k).

Where Should You Invest After Maxing out Your 401(k)?

After maxing out your 401(k), you’ll need to find a new place to stash savings. Below are some potential places to invest outside of a 401(k).

• Open an Individual Retirement Account. An IRA offers another place to build retirement savings. As of 2024, you can contribute up to an IRA, if you meet the income requirements.
• Open a Health Savings Account. An HSA offers a tax-advantaged way to save for health care costs.
• Save for college. If you want to help your kids pay for college, consider investing for their future through a 529.
• Open a taxable brokerage account. A taxable brokerage account allows you to build an investment portfolio without any tax advantages. But you can access the funds at anytime before retirement without an IRS-enforced penalty.

Takeaway

Maxing out your 401(k) is a good goal for some savers. If this goal makes sense for your budget, then automate your contributions today to max out your 401(k) this year.

FAQ

You have questions about maxing out your 401(k). Here are the answers.

• Can I contribute 100% of my salary to my 401(k)?
  • You are allowed to contribute up to 100% of your salary to your 401(k), up to the annual contribution limit. If you earn less than the annual contribution limit, you can theoretically contribute your entire salary to this tax-advantaged account. But practically, federal and state tax withholding requirements typically prevent savers from contributing their entire paycheck to their 401(k).
• What percentage of my paycheck should go to 401(k)?
  • As a general rule of thumb, experts typically recommend putting between 10% to 15% of your salary in a 401(k). But if that’s not possible, consider trying to put at least enough to score any matching contributions from your employer. For example, if your employer offers a 3% match, do your best to contribute 3% of your salary in order to receive those matching funds.
• What if I can’t afford to max out my 401(k)?
  • It’s okay if you cannot afford to max out your 401(k). If you cannot reach the annual contribution limit, do your best to contribute around 10% to 15% of your salary. Setting aside this money now can make for a more comfortable retirement. Opting to save less could mean you’ll need to delay your retirement or find other ways to build your retirement savings.
• When should I max out my 401(k)?
  • If you want to max out your 401(k), it’s a good idea to pay off high-interest debt and build your emergency savings first. Once your finances are stabilized, you can max out your 401(k) confidently, if you have enough room in your budget to cover other basic costs.

This article originally appeared on GOBankingRates.com: How To Max Out Your 401(k): A Step-by-Step Guide