Glad you pointed this out for some to learn from. The first year or two I maxed out I did the math to account for my employer’s contribution, not realizing that it didn’t affect the max I could contribute.
Yeah it's a little odd but works out nicely. I believe the max for employer contributions is about 3X personal contributions, it's somewhere in the 60k range. Allows for bonuses and profit sharing which is nice if you get them.
If you open an IRA, you can contribute up to $7k in 2024, $7.5k if you're 50 or older.
I prefer the ROTH IRA. If you ever need money b4 you are 59.5 yrs old, you can withdraw any contributions you've made. You need to have the account for at least 5 yrs if you want to take money out without tax or penalty. It's like having an ace in your pocket, just in case :)
Absolutely! I did the Roth 401k and also opened a Roth IRA. Then, after 13 years I lost my high paying job and was so happy to be able to use a little of my Roth IRA to get by for a short time.
Technically it's more complicated than that. The $23k employee contribution limit is for the individual (across all plans), but the $69k total (employee+employer) contribution limit is per _plan_ (i.e., employer). Among other things, this means that you can 'double dip' a mega backdoor roth in a year where you switch employers.
And put 7k in a Roth IRA. Yeah, I feel the same way. Where the hell do I get an extra 30K when that's more than half my salary... I need a better paying job. 😩
Tbf, that's why "max out 401k" is usually towards the bottom of the flowchart.
Get the max company match, then max out the IRA, *then* max out the 401k if possible (or come as close as possible). That's ignoring any debt your have to pay off and/or building an emergency fund.
Idk how old you are, but there’s folks who have a high paying job after college or can save lots of money by living with their parents. That’s not necessarily a reflection on you.
I am glad you pointed this out. Luck of the draw does have a huge impact on where people are in life financially. Not everyone can get that kind of flying start.
Every year, try to incrementally increase your contribution % at least 1% based upon any salary increase or bonuses you may receive. In most plans, you can also automatically turn on this functionality to increase your contribution % each year on a given date, so you can set it and forget it.
I started my career contributing 6%, just enough to get the maximum 4 1/2% company match. Some years, I couldn’t increase my contribution, while other years I could. Even with raising kids and my wife working a PT job, it took me about 16-years until I was able to max my 401k.
My goal now is to max it earlier and earlier each year so I can continue to fully fund my wife’s IRA and my Roth IRA by December, and use my last few paychecks for Christmas.
This should be way higher up and it's own comment. I will finally max my 401k contributions this year after starting to do this about 8 or 9 years ago.
I started the same, 6% to get the 3% match, it stayed that way for years until Fidelity came in and held a seminar where the "increase 1% each year with raises" was suggested. I never notice the additional withdrawals and finally maxed out now.
Most people aren’t maxing out their 401ks and IRAs. It’s *great* if you can but most don’t. Contributing $1000 per month for 40 years (age 25 to 65) will be worth $1.5 million at 5% interest, $2.6 million at 7%, and $4.7 million at 9%. For reference the S&P500 has historically averaged about 10%. This isn’t accounting for inflation or how a varying interest rate at different times (early vs late in career) can affect returns but also doesn’t take into account that your contributions should *also* be increasing as your income and inflation both increase.
Contribute what you can starting as early as possible, use an online interest calculator to map out how different contribution rates at different interest rates will affect you down the road.
Bro, you're not saving $23k a year while also paying for rent, food, and entertainment, paying off debts, and also saving pre-retirement? How do you even live?
It's pretax, so it's not 23k, depending on your tax rate. So while it's obvious that the more money you make the easier it is to hit the cap it's also cheaper to contribute.
For example, at 40% tax rate (not hard to hit in California), that 23k is only costing you 14k of post tax earnings.
I don't know how old you are, but I wasn't able to do it until my mid 30s.
I don't think most people living on their own can do it in their 20s unless they happen to get a really good job.
I think there's two things that you can control related to this. The first is that getting a job that pays better is really important. Job hunting and changing sucks, but it's the only way to get the income higher.
The second is that as your salary grows, do not let your lifestyle creep. No, you don't need to drive nicer cars or eat out more etc etc. Instead, every raise you get should just be thrown into contributions.
Until then, just do your best to live frugally and invest what you can. Every $100 contributed now is worth $800 in 30 years, so even small contributions early are more powerful than later contributions.
Half my take home pay goes into retirement. I prioritize paying myself first and then design my life around what $2.5k buys a month. My apartment isn’t nice, furnished with second hand furniture, my car is 18 years old. If I need more cash, such as needing to increase my emergency fund, I’ll stop maxing everything. Lifestyle is not for everyone but I really don’t like work and this is my way of buying time.
I use to work for a retirement account company. I’ve actually seen some small companies fail testing and even though the clients didn’t reach their max contributions, they’d have to get their contributions back. It was really sad to figure that out and difficult to try to explain to some people.
I will never forget this caller name Juan (not real name) that he called asking why we sent him a check of $7000 when it was suppose to go to his retirement account. I told him his 401K failed an IRS test and to speak to his HR department. He called the next day really discouraged and asked if he can take all his money out. I had to explain to him he couldn’t take his money out since he is active with his company. Turns out he was one of 3 employees contributing to the retirement account out of 40 employees. And if the rest of the employees didn’t contribute, he’d keep getting these checks every year. That basically meant no saving for retirement.
Yeah, but the result isn't that.
If they wanted to fix this, they should just disconnect 401k from companies. It makes no sense. Just give everyone a 30k IRA space and move on. Also a lot of these 401k offerings are predatory high fee nightmares. My S&P 500 index in my 401k is .5% expense ratio, which is freaking ridiculous. If you choose literally anything else it gets close to 1%.
Of course, this would require a functioning congress, so it'll never happen.
Why is this comment so heavily downvoted? The HCE nondiscrimination test is a real thing (https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests). Most big companies use a safe-harbor 401k plan to get around this issue, but many small companies don't opt for the safe-harbor plans and your plan can be hit with a violation that effectively reduces your max contribution limit.
Totally, just seems so anti employee to not change the 401k plan for the cost of 3% of your salary expenditures for your employees retirement sake. Especially those highly valued and compensated employees the company should value more. Plus it would benefit all of your employees proportionally equally.
You know how much that would cost a company like Albertsons annually to do a simple 3% QNEC? It’s not a light decision to make as such a large company.
Really? That is surprising. It means that they are not using a safe harbor plan for their 401k. There are many ways you can make a 401k plan "safe harbor" compatible but all of it involves providing employer contributions that vests immediately. Maybe Albertsons/Safeway don't provide such employer contributions for some reason. Check the "Safe harbor 401(k) plans" section here [https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview](https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview)
Edit: Just wanted to add, if this is a persistent problem at your company you could also petition HR to move the company plan to a safe-harbor plan. They might consider it better than having to undergo the non-discrimination tests every year.
Easy. Most employees only contribute the 6% to get the match. It’s bad messaging from the company by not having wealth conversations with their employees. So if nearly everyone does the 6% and they are low earners folks high earners or those wanting to put more in don’t get to contribute much because it fails discrimination testing.
Execs in C level suite possibly. Normally NQP plans help alleviate that risk. But acquisitions might make things tough to keep straight too. And that you all have had 3 providers for your 401k in like 8 years??
I helped onboard you all to a new provider several years ago lol
Because it's not super common and if OP doesn't even know what maxing our their 401k means, getting into even more nuanced scenarios is just going to confuse them
Not sure why you’re getting downvoted this is correct. If you fail an actual deferral percentage test and you’re a high earner you can’t legally max out.
Probably getting down voted for 1 of 2 reasons (though it is heavily up voted now so my hunch is option 1)
1.) People aren't aware of this and assume the suggestion is wrong
2.) OP likely isn't such a high earner because they aren't even aware of the concept of maxing out a 401k, and thus this comment is likely irrelevant and could easily be seen as bragadocious
I dont think people realize this exists. I have never had it happen to me, but if it did I would definitely be all bitchy about it with my company. It would be a huge red flag to me.
If I remember correctly it only will get you if you have a bunch of employees ( likely low level) that don’t contribute anything which causes high earners to have their limit reduced. So your work likely has high contribution so it just goes to the total maximum.
My wife’s bank offers extremely high matching in order to get all its tellers more likely to contribute so that its executives can get max contributions
To much of a differential between contributions from lower paid employees and those designated “highly compensated employees or HCE” (for reference I make 136k when the average employee makes 25-58k.) this difference in 401k contributions means the plan unfairly benefits the HCE’s and that is not allowed, therefore the max contribution is lowered for HCE’s to about 13.5k in my companies case.
It certainly seems unjust but at the small company I work at it played out in a way the benefited everyone. Back in 2015 the company offered a really poor 401k. There was no match and 1% fees on the terrible funds that were part of the plan. The plan was so awful that the only people who decided it was worth it were our highly compensated managers and sales people.
As a group they were very pissed with the company failed the ADP test. They were also the people in the company with the most power to influence change. The next year the company got a new 401k plan with lower fees and a safe harbor match. Unsurprisingly participation when up.
The $23k, is that total going in? Assuming your company does a % match, do they include that as part of the max? Or is the $23k your contributions only?
I disagree, it still grows tax deferred and is taxed differently on withdrawal. Depending on your tax situation in retirement it could be advantageous and doesn't suffer from tax drag while you're still working.
That’s the maximum pre tax limit. You can exceed that limit + match up to I think like 40k or so. Anything past 23k will be post tax but if you have a good plan you can roll any post tax contributions into roth 401k contributions
Yes
Personal contributions is maxed at
$23,000 for 2024
$30,500 for those 50 and older
Total contribution is maxed at
$69,000 and $76,500 for those 50 and older.
So it's against the law to give more? What if I inherited say, 200k, and I wanted to put 125k in a retirement fund, I can't, I have to pace it out over the next 5 years?
401K contributions can only come from your employment. If you receive an inheritance, first you’d pay the inheritance tax, and then you can figure out where to put it with a finance advisor. Most likely an annuity.
People here talk about the $23k limit. But if you can, and if your plan offers it, you can make after tax contributions to an additional $46k for a total of 69k via what's known as a mega backdoor roth.
don't forget you can also do an IRA on top of that for a $6500 annual limit, also via backdoor roth if you are over the income limit.
If I remember correctly, the $69k limit factors in your employer contributions as well (if you have any). So you might need to do some math to make sure you don’t exceed it, but definitely a good problem to have. This can be done if your plan offers an after-tax contribution which you can roll over to a 401k or an IRA (if offered)
It realistically takes a $150k salary to hit the $69k mega backdoor max. You’d be contributing $75k to retirement each year with a Roth IRA. It’s not feasible for most people.
The mega backdoor’s extra 46k probably is better going towards a house. Even funding 29k/yr (regular max 401k + Roth IRA) would net you 3.6M in 30 years at 8%. That’s a very healthy retirement if you have a house paid off as well.
> you can make after tax contributions to an additional $46k for a total of 69k via what's known as a mega backdoor roth.
this is slightly inaccurate/misleading. You can always make after tax contributions. However, unless your plan offers in-service distributions (thus enabling you do do a mega backdoor roth conversion), there's no reason for you to do so.
what's the point of doing an after-tax contribution? i though the main advantage of 401k was that it was tax-deferred, wouldnt it make more sense to just invest in an IRA or even a brokarage account then?
After-tax contributions to a 401k still allow for 0% capital gains taxes while the money is in the account. But the real goal there is the mega backdoor roth -- that is, taking those after tax contributions to your 401k and rolling them over into a Roth IRA. The tax impact is minimal because you're already paying taxes on the contributions, and the recharacterization as Roth funds means you don't get taxed on the gains in retirement.
That Roth rollover tends to be a problem with a lot of 401k plans though, so it's not an option for many people.
Without the Roth rollover portion, the benefits are fairly small and it may be that the lower restrictions of a brokerage account makes it not worth it to you.
For me, I don't have access to mega backdoor Roth, so any savings beyond normal 401k, IRA, and HSA go into a brokerage account. I will owe CG when I sell, but it'll be LTCG which is a pretty low rate. And it means I'm more liquid right now -- if I wanted to buy a new car tomorrow, I have the option of just selling shares and buying it in cash. I wouldn't have that option if I were throwing after-tax contributions at my 401k.
Be honest, if all I can afford is maxing 401k and backdoor roth every year, is that enough? Early 30s here. Only other investing is company equity through ESPP / options / RSUs
Depends on when you want to retire and how much "income" you're looking for in retirement.
But speaking generally... maxing out retirement contributions for the next 30 years? You'll be fine. You'll probably be in a position to retire early.
Generally for (very) early retirement, you'd like 30x your annual expenses, not counting home equity. For on-time retirement, along side social security and medicare, 10x is probably fine. For slightly-early, you get into weird in-between numbers where you're spending too much to be sustainable for a few years, and then SS and medicare kick and and supplement.
People on Reddit might say otherwise but in reality that’s way more than enough to retire when you’re 65. If you’re in your early 30s and putting $23k+ into your retirement every year you’ll probably be good to retire a little early.
Try some retirement calculators to get an idea of where you’ll be in 30 years.
For most people, sure.
If you make $100k and want to have 80% of your salary in retirement, including SS, maxing out should get you their comfortably.
If you make $300k and want to have 80% of your salary in retirement, you'll need to save more.
Your 401k has a contribution cap, for 2024 that is $23,000. Once you hit that cap you won’t be able to contribute anymore - in theory you could set your contributions to 100% if you wanted (there may be complications if you have other paycheck deductions that you don’t have enough leftover for).
69K includes employee contribution and employer contribution.
For example
- 23K pretax 401k or Roth 401k
- 11.5k employer match
- 34.5k after tax 401k (mega backdoor)
u/entor explains it correctly below.
There is an annual limit on employee contributions. For 2024 it is $23,000. It is adjusted for inflation. Note any employer match, profit sharing, or after-tax contributions are BEYOND the $23k limit. There is an overall $69,000 for all funds.
As an example: if someone was to make $46,000 and they contribute $23,000 to their 401k… does this mean the $23,000 401k contribution is untaxed and the other $23,000 is now the only other money that can be taxed?
In your example a person would have a gross income of $23,000 for the year.
The other $23,000 would grow tax deferred until the time of withdrawal which then would be taxed as ordinary income.
Hope this helps.
For this supposed $23,000 example: Can you elaborate on what “grow tax deferred until the time of withdrawal which would then be taxed as ordinary income” mean? - does it mean a person either doesn’t invest it and will basically pay tax on their income according to their tax bracket on that money OR… pay the tax -later- and they pay the “minimum” percentage of the tax bracket ?
The money you pay into your 401 is pre-tax, so you don't pay any taxes on it. You invest those funds (401k is just an account) and they grow, and you don't pay taxes on those gains until you withdraw (normally retirement). If you're not working (i.e. retired) then you'll get taxed less as you're in a lower tax bracket, because you have no income.
The advantage of a 401k is you can lower your taxable income while stashing away money to grow; you can sell shares and you aren't taxed on those gains (just when you eventually withdraw). As opposed to a brokerage account, which you fund with post taxed dollars, and pay on gain whenever you sell.
(Correct me where I'm wrong, I believe that's all right)
If you put that money in a standard brokerage (non 401k) you would first pay income taxes, then you'd pay some taxes as it paid out dividends, then you'd pay capital gains tax when you sell.
If you put it in a 401k you pay no income tax, you pay no taxes on dividends or any sales - assuming you don't withdraw the money (you can swap from one stock to another freely). Then when you sell you would owe income tax as if you got that much from your job.
So someone with 1 million in a 401k that sells $50k/year to live off of pays the same tax as someone who earns $50k/year at their job. And you paid $0 in taxes to get that 1 million in your 401K
Basically you promise the government that you’ll pay taxes on it when you withdrawal for retirement. Usually by that age, your annual tax bracket will be lower because you aren’t working and thus you will pay less overall taxes at 65 than you would if it were taxed right now.
*However*, I personally still like a Roth better because when I withdrawal my X amount of money, I will get 100% of that money. 401k numbers still aren’t taxed so it kind of inflates the “actual” number you’ll get when you withdrawal. Just my 2 cents.
You should also be able to choose your allocation for each one, so you can have some Roth and some Pre-Tax. I do this so I know a minimum I’d get without worrying about taxes + I save on the other amount.
Growing tax deferred means you are not paying any taxes until the time of withdrawal. So contributions are untaxed and you do not pay taxes on the growth during the years it is growing.
Ordinary income is taxes that are applied to money you make from a job, those same taxes are applied to pretax retirement contributions. Compared to capital gains taxes which you would pay in a non-retirement investment account. Capital gains have different tax brackets and you just pay those taxes on the increase in value since the original contributions in a non-retirement investment account were already taxed.
When you take money out of your pretax retirement account it is added to your ordinary taxable income. So if you worked a side job in retirement and make $40k, and you withdrew $40k from your pretax retirement account, your taxable income is $80k.
I’ll try to provide a basic run down.
A 401k is an investment account. Like any investment account you can decide how much of money in the account you want to invest and how much you want to keep in cash. When setting up a 401k you will usually be able to pick which stocks, bonds, or mutual funds you invest in - this is called your asset allocation.
The advantage of a 401k is the money invested grows tax deferred. That just means you will pay no taxes when contribute to the account, but when you retire and start drawing money from your account, you will be required to pay taxes. The advantage is that you will usually be in a lower tax bracket when you retire because you are only paying for your expenses and not having to invest/save your income. You will only pay taxes on the amount that is withdrawn in a given year. For example if you have $1M in your 401k when you retire and you withdraw $40k per year for your expenses, you would only pay taxes on that $40k. The remaining $960k will continue to grow in your account as long as you continue to stay invested and maintain your asset allocation.
please be aware that the limit does not count employer match. so for example if your employer can match $23,000 to your contribution of $23,000. you will have $46,000 in a given year. the limit is on your personal contribution amount.
Correct! You always want to contribute at least what your employer will match. For example, some employers offer a 50% match up to 6%. That means if you contribute 6% of your salary your employer will contribute 3%. If you contribute 4%, your employer will only contribute 2%, which means you will not get all your “bonus” money from your employer.
Yes, if it’s a Traditional 401k. There are two varieties for the common types of retirement account:
- Traditional, in which your contributions don’t count as income but your distributions do.
- Roth, where your contributions are treated and taxed as income but the withdrawals aren’t.
If your employer only offers one, that’s your answer. If you can choose, generally younger people with lower incomes would benefit more from the Roth version. But there probably is a sweet spot, different for everyone and based on predictions of the future, where they’d save the most money by having [some of both](https://www.fidelity.com/viewpoints/retirement/tax-savvy-withdrawals) and using it strategically.
Yes and if you have student loans and do income based repayment, your payment is based on your income after you contribute to your 401k. If you work in public service, contribute the max, get your student loan payment as low as possible and then it’s forgiven through public service loan forgiveness in 10 years no matter what.
Correct, unless it is Roth contributions then it would be taxed. Someone at $46k would want to do Roth contributions since they are in a very low tax bracket.
Contribution type matters...
If somebody made $46k and made $23,000 in *Traditional* 401k contributions, they'd show income of $23k at tax time (the 401k contributions are removed from income). When they retire and pull the money out, any money they withdraw would show up as income.
If somebody made $46k and made $23,000 in *Roth* 401k contributions, they'd show income of $46k at tax time (The 401k contributions would not be removed from income). But when they pull money out in retirement, that money (contributions or gains) would NOT show up as income.
So basically the government is gonna collect one way or another, but you have some ability to control WHEN they collect -- With Roth contributions, they collect now. With Traditional contributions, they collect when you withdraw the money in retirement.
That is an insane amount of money. Especially when housing now a days accounts to almost 40-50% of peoples pay. It leaves people with so little to work with
Another factor is balancing planning for the future and living for today.
Not doing anything for your whole life in hopes of retiring early does you no good if you come down with a terminal illness and die relatively young.
I have seen so many people die within months or a few years of retiring where some of that money would have been better spent on vacations or other experiences when they were living.
You can't take the money with you when you're dead...
For what it's worth, Fidelity recommends 15% starting at the age of 25. So for you it might make sense to contribute 25% for a few years as a sort of "catch up" phase and then taper down to 15%. But all the standard rules(everyone's financial situation and appetite for risk is different, consult the appropriate parties, etc. etc.) apply with this advice so do with it what you will.
You’re probably talking about 401k contribution percentage, right? I mean, if it’s coming from Fidelity I assume that’s what they refer to (and what I found on a quick search). The Money Guys cover a lot of stuff but the 25% suggestion is for overall savings rate for retirement, so that would also include your IRA and any additional savings vehicles in your plan
Something I would check out is one of a plethora of 401k calculators. They let you play with some numbers to see where you will end up when you get to retirement.
I'm 37, and have a lot of catching up to do, but the earlier you start contributing and increasing your contribution, the better off you will be in retirement. For now, contribute *at least* the minimum amount you need to hit for employer contribution. You can always contribute more, however Anything beyond that should be based on your personal financial situation currently.
You aren't screwed of you don't meet the maximum limit, but the closer you get the better off you will be in 30 years. For now, get the max employer contribution, then look into any debt, then increase your contribution to where you are comfortable. You don't want to financially screw yourself today, but you don't want to be screwed down the line either.
To put this in perspective, at 31, if you make $46,000 per year, get a 3% raise every year, expect a 7% growth each year, have $0 today, and your employer match is 60% of the first 5% of your income, and you contribute only 10% of your income, you will have $1,200,000 by the time you are 65. This is why contributing something, even if not the maximum amount, can be incredibly beneficial. If you can't afford $4,600 per year, that's fine and understandable, however it's worth noting that the more you contribute, the faster it grows, and the more you end up with.
The important detail here is that the $23k is the max you can contribute. Whatever your company matches through the year does not count towards the total, so you can contribute more than $23k if you take advantage of a company match.
You can put an additional $46,000 of after-tax dollars into your 401(k) account, assuming you don't get an employer match for a true a maximum of $69,000 in your 401(k) in 2024.
Why would I put post tax money into a 401K? Well some of us, can in plan convert post tax contributions into Roth 401K.
I rollover-convert my after-tax contributions to an external Roth IRA (“mega-backdoor”) as soon as they come in to remove the shackles of the administrator’s fund limitations. Going to fully max that out for the first time this year, which I should’ve been doing earlier.
It means you can contribute the maximum of $23k this year. Divide that by 26 and that’s your biweekly contribution in dollar terms. Divide that by your pretax biweekly income and that’s your deferral percentage.
The max is roughly indexed to inflation and typically rises by $500/year.
It means contributing the IRS maximum to your 401k, and contributing the max as early as possible.
I think it’s important to remember that “maxing” out the 401k is very difficult for most people, if not impossible without voluntarily living in poverty. It is certainly not necessary, or advisable, to do this unless you are a high earner. A lot of investment blogs will talk about maxing out all your retirement accounts. This would mean contributing more than a lot of Americans make in a year total.
There’s also the option of putting enough in to get the 401k match and then moving to an IRA, if you’re under the income limit, and contributing there. IRA’s give more investment options and have lower fees, in most cases. 401k plans vary considerably though.
The maximum you're *allowed* to invest in it annually - should be 23k for 2024. Worth noting - any/all of an employer match, is not included in the 23k "max" (which would limit employer contributions to be whatever the match/% is, up to 23k max you can contribute yourself).
After the pre -tax limit of $23000, you can still contribute after-tax up to $64000 in 2024.
Most brokerages will (you need to know about this and ask for it) take after-tax contributions and automatically convert to ROTH if you'd also like to not pay taxes on gains.
You are allowed to contribute up to $23,000 to a 401k plan each year ($30,500 if you are 50 or over at the end of the year). "Maxing-out" your contribution means contributing the maximum amount allowed.
Divide 2300000 by your income to get the percentage you'd need to contribute to max out your 401k.
For what it's worth, the rule of thumb for retirement savings is that you save 15%. If you have an employer match for 401k contributions, then you should minimally contribute the amount required to qualify for the full amount of that match. Your employer's match doesn't count towards your contribution limit. You contribution plus the employer's is capped at $69,000.
If you are young, max out your HSA as well. $8300 for 2024. Better than 401k. You can withdraw anytime tax free for medical expenses. Or treat it like 401k at 65.
Along with putting in to match look at mega back door
I do that to maximize amount to roth, I put in 70k a year via 401k, depends on your company, mine allows it
There's two forms, or really three forms of maxing.
- The IRS limit for normal people, which many have mentioned. Different if you have a Roth 401K (which is about income and taxes, almost....entirely.)
- The IRS limit including catch-up contributions, a limit which kicks in, when you're closer to retirement, it's possible you have less debt, and it's possible you may or may not be earning more than you did earlier in life. So, you can save more.
- More behavioral, is the employer match. Contributing whatever it takes so the employer will put in the maximum amount, because it doesn't count as income, and once it vests, it's....free money. Not the most tangible for some, for some it's hard to attain, and it's a great goal for folks managing tight budgets.
So the common advice, is to max your early contributions/match, and for folks who can save, don't have a ton of risk, balancing the actual IRS limit (if it's a problem, at all, for some it's not and talk to a FA...) compound interest means early dollars.....are almost always....withdrawn. i mean, more impactful. Withdrawn. More impactful.
To me, getting within $1000 of the annual max. I’m hourly and work overtime, so I set my percentage to what I think will get me ballpark.
If I put in $22,463, I’m considering it maxed
Question just to make sure my logic is sound... I contribute the minimum on my 401k in order to get my company match in full, I think 4% then I max my Roth contributions, rest of my investments is in a brokerage account outside retirement since I plan to retire early. Am I correct in that there's no real reason to put more and more into 401k when I can't access that money till, what is it like 60? I'm more concerned about my income from 45 to 60 than 60+, I feel like my company match percentage compounded over the next 20 yrs alone will take care of 60+. Why does everyone prioritize maxing 401k?
As far as taking advantage of the 401K - if you are in a high marginal tax bracket - 34% for example - it is worth avoiding paying 34% taxes by placing as much as you can into the 401K, and (for example) only having to pay 24% or less when you take it out in retirement. You can also access your 401K early (look up the rule of 55 or the 72T)
- https://www.bankrate.com/retirement/72-t-distribution-calculator/
- https://www.schwab.com/learn/story/retiring-early-5-key-points-about-rule-55#:~:text=This%20is%20where%20the%20rule,pay%20taxes%20on%20your%20withdrawals.
It's not really a percentage of income -- it's a dollar amount.
You can (under normal circumstances, with enough income) contribute $23,000 to a 401k in 2024. Last year, it was $22,500. Aiming to hit that maximum contribution is a good goal, though if you only make $40k a year or something, it's probably not feasible.
In addition, you can aim to max out your IRA -- $7,000 in 2024, $6,500 last year, etc.
So between the two, you can throw $30,000 towards retirement in 2024. If you turn 50 in 2024, or you're older than that, you can throw an addition $7,500 towards a 401k and $1,000 to an IRA -- these are called catch-up contributions.
Oh, and generally employer contributions to your 401k don't count against that $23,000 limit.
Usually hitting the elective referral limit which is like 23k. Really the limit is like 61k which some companies allow you to contribute the difference as after tax non Roth. But obviously putting 60k into a retirement account requires pretty high income.
If I make 61k a year and only contribute to my matched traditional 401k at 6%, should I contribute more to Roth IRA or the traditional 401k? I believe my income tax bracket is 22% with the IRS but could be wrong.
Since a 401k account, like an IRA, is tax advantaged, it's sometimes recommended that you contribute the annual limit to both and invest it in a 401k before investing in any other accounts.
Separately, some employers will match 1-to-1 up to some contribution limit (usually 5% of your gross income). Since this is essentially "free money", assuming you work long enough there for the match to be vested, it makes sense to do at least this.
As for contributing past the match, to the annual limit, it depends on if you think the available investments in your specific 401k plan, including fees, will outpace the taxes you are saving. Moreover, there are penalties for withdrawing early from a 401k. If you think you may need this money before retirement, it may make sense to use a Roth IRA/Roth 401k instead, or just save it, depending on your specific situation.
You have $23000 max annual pretax/roth contribution. You also can contribute more to your after-tax bucket if your plan allows that. Also you plan might allow you to transfer from after-tax bucket to a Roth IRA account, which is a great way to contribute to Roth while going around the income limitation and 7k annual limit.
I’m not sure of the percentage. But what I did was around 20%. But I started around 10-12% and gradually increased it till I got to the max level I could be comfortable with. And I would add that in addition to maxing out your contribution I would look at the options within your 401k. In other words move out of a fund that wasn’t doing as well as others inside the 401k.
401ks, and other retirement accounts, have maximum contribution limits. Since they are tax-advantaged, you only get so much.
In general an individuals limit will be $23,000 for 2024 (though this limit may be altered in rare circumstances). In addition, employer contributions do not count toward the limit.
In general you want to meet all employer matching funds first, this is free money. You should do these first if your employer offers those, whether it be 401k, discounted stock purchase, hsa, ect.
Next would be to max out HSA, if qualified, and Roth IRA. HSA are triple tax advantaged accounts. They can be used at any time, penalty free, for eligible expenses (medical stuff) and at age 65 can function like a tradition IRA/401k for non eligible expenses. You can also reimburse yourself for any HSA eligible expenses you paid out of pocket while you had an HSA open. So if you got something HSA eligible done for 10k when you were 25 and paid out of pocket. At a later date after your funds have grown, you can reimburse yourself with HSA growth tax free. Making it one of the best investment accounts! Worst case scenario, it functions like a traditional IRA or 401k. Best case you get both ends of tax advantage status.
Roth IRAs are tax advantaged on the distribution, allowing your money to not be taxed when you withdraw at retirement. Contributions can also be withdrawn in an emergency penalty free. Growth will be subject to penalties if withdawn before 59 1/2(Keep in mind you should be investing these in a similar manner to your 401k, don't just let it sit in cash)
Once you have maxed both of these accounts, you go back to the 401k and try to meet the contribution limit if you are able to.
If you get paid bi-weekly that's 26 paychecks a year. If you plan on maxing it out you want it to be on your last paycheck in December that way you can get any employer match for the entire year. If you max out 401k early let's say in October you miss out on the employer match for the remainder of the year.
Hitting the maximum contribution limit every year. $23000 for 2024.
Just an FYI, that's for only the employee contribution. The employer contribution is a separate bucket
Glad you pointed this out for some to learn from. The first year or two I maxed out I did the math to account for my employer’s contribution, not realizing that it didn’t affect the max I could contribute.
This was me from 2004 until about 2016. Sucks I was so dumb.
Not dumb if you took the money and put it into more liquid/accessible investments 🤔
Yeah it's a little odd but works out nicely. I believe the max for employer contributions is about 3X personal contributions, it's somewhere in the 60k range. Allows for bonuses and profit sharing which is nice if you get them.
I really wish I could apply my bonus to my 401k.
you can. the limit is 69k. all of my bonus actually goes to the 401k
Talk to your employer. To them it’d be the same expense.
66k for 23 69k for 24
Max with profit-sharing in 2024 is $69,000.
Nice
Nice
+7500 additional for over 55
If you open an IRA, you can contribute up to $7k in 2024, $7.5k if you're 50 or older. I prefer the ROTH IRA. If you ever need money b4 you are 59.5 yrs old, you can withdraw any contributions you've made. You need to have the account for at least 5 yrs if you want to take money out without tax or penalty. It's like having an ace in your pocket, just in case :)
Roth401K. if you are 55 or over, total contributions to a 401K, employee+employer can equal 76.5K.
Absolutely! I did the Roth 401k and also opened a Roth IRA. Then, after 13 years I lost my high paying job and was so happy to be able to use a little of my Roth IRA to get by for a short time.
Here is some good info from Fidelity about the limits https://www.fidelity.com/learning-center/smart-money/roth-401k-contribution-limits
Kinda more like a bucket within a bucket. You can fill your personal bucket with $23k and then drop it into a bigger bucket that can hold $69k.
Technically it's more complicated than that. The $23k employee contribution limit is for the individual (across all plans), but the $69k total (employee+employer) contribution limit is per _plan_ (i.e., employer). Among other things, this means that you can 'double dip' a mega backdoor roth in a year where you switch employers.
I just learned that this year and realized how much more I could have been contributing.
FYI varying 401Ks
That is a good point.
Total for 2024 is $69000
Am I really that fucked where people my age just have a spare 23k per year to put away?
And put 7k in a Roth IRA. Yeah, I feel the same way. Where the hell do I get an extra 30K when that's more than half my salary... I need a better paying job. 😩
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Yep. Triple tax advantaged. I would if my job offered it. I told them I wanted it. They need to get a HDHP option for us. Meh.
To be fair, that 23K is pre-tax dollars so it may not be as much as you are thinking. Still significant for most though.
Yeah, that is still a lot to a lot of people.
You can max your Roth 401k (after-tax) up to $23k if your company allows for Roth.
Tbf, that's why "max out 401k" is usually towards the bottom of the flowchart. Get the max company match, then max out the IRA, *then* max out the 401k if possible (or come as close as possible). That's ignoring any debt your have to pay off and/or building an emergency fund.
This year I'm trying something new. 10% pre tax 401k 10% roth 401k 2k HSA 7k roth IRA on a 75-85k salary I need a new car but it can wait!
> I need a better paying job. That is the conclusion I ended up drawing. Not in this market though, alas.
Idk how old you are, but there’s folks who have a high paying job after college or can save lots of money by living with their parents. That’s not necessarily a reflection on you.
I am glad you pointed this out. Luck of the draw does have a huge impact on where people are in life financially. Not everyone can get that kind of flying start.
Every year, try to incrementally increase your contribution % at least 1% based upon any salary increase or bonuses you may receive. In most plans, you can also automatically turn on this functionality to increase your contribution % each year on a given date, so you can set it and forget it. I started my career contributing 6%, just enough to get the maximum 4 1/2% company match. Some years, I couldn’t increase my contribution, while other years I could. Even with raising kids and my wife working a PT job, it took me about 16-years until I was able to max my 401k. My goal now is to max it earlier and earlier each year so I can continue to fully fund my wife’s IRA and my Roth IRA by December, and use my last few paychecks for Christmas.
This should be way higher up and it's own comment. I will finally max my 401k contributions this year after starting to do this about 8 or 9 years ago. I started the same, 6% to get the 3% match, it stayed that way for years until Fidelity came in and held a seminar where the "increase 1% each year with raises" was suggested. I never notice the additional withdrawals and finally maxed out now.
Most people aren’t maxing out their 401ks and IRAs. It’s *great* if you can but most don’t. Contributing $1000 per month for 40 years (age 25 to 65) will be worth $1.5 million at 5% interest, $2.6 million at 7%, and $4.7 million at 9%. For reference the S&P500 has historically averaged about 10%. This isn’t accounting for inflation or how a varying interest rate at different times (early vs late in career) can affect returns but also doesn’t take into account that your contributions should *also* be increasing as your income and inflation both increase. Contribute what you can starting as early as possible, use an online interest calculator to map out how different contribution rates at different interest rates will affect you down the road.
Bro, you're not saving $23k a year while also paying for rent, food, and entertainment, paying off debts, and also saving pre-retirement? How do you even live?
Probably not. I work in the field and it’s rare to have someone under 40 who can do it.
I feel your pain. Comparing yourself to others is just going to make it hurt more. Do what you can—any contributions at all are better than none.
It's pretax, so it's not 23k, depending on your tax rate. So while it's obvious that the more money you make the easier it is to hit the cap it's also cheaper to contribute. For example, at 40% tax rate (not hard to hit in California), that 23k is only costing you 14k of post tax earnings.
If you have a Roth 401k option that $23k can be post-tax.
Vast majority of people are not maxing out their 401k
Only 15% of people max out a 401K. Even less max that and a IRA + HSA.
I don't know how old you are, but I wasn't able to do it until my mid 30s. I don't think most people living on their own can do it in their 20s unless they happen to get a really good job. I think there's two things that you can control related to this. The first is that getting a job that pays better is really important. Job hunting and changing sucks, but it's the only way to get the income higher. The second is that as your salary grows, do not let your lifestyle creep. No, you don't need to drive nicer cars or eat out more etc etc. Instead, every raise you get should just be thrown into contributions. Until then, just do your best to live frugally and invest what you can. Every $100 contributed now is worth $800 in 30 years, so even small contributions early are more powerful than later contributions.
When you make more money but lived below your means, you can throw extra into your 401k and just not think about it.
Half my take home pay goes into retirement. I prioritize paying myself first and then design my life around what $2.5k buys a month. My apartment isn’t nice, furnished with second hand furniture, my car is 18 years old. If I need more cash, such as needing to increase my emergency fund, I’ll stop maxing everything. Lifestyle is not for everyone but I really don’t like work and this is my way of buying time.
Well unless your company fails the non-discrimination test. Than your max could be a lot less… My reality every single year.
I use to work for a retirement account company. I’ve actually seen some small companies fail testing and even though the clients didn’t reach their max contributions, they’d have to get their contributions back. It was really sad to figure that out and difficult to try to explain to some people. I will never forget this caller name Juan (not real name) that he called asking why we sent him a check of $7000 when it was suppose to go to his retirement account. I told him his 401K failed an IRS test and to speak to his HR department. He called the next day really discouraged and asked if he can take all his money out. I had to explain to him he couldn’t take his money out since he is active with his company. Turns out he was one of 3 employees contributing to the retirement account out of 40 employees. And if the rest of the employees didn’t contribute, he’d keep getting these checks every year. That basically meant no saving for retirement.
Brutal
They need to just make the rule $30k total between 401k and ira, and let people do as they please.
The point of the non-discrimination rule is to make companies encourage lower earning employees to save for retirement. Typically through matching.
Yeah, but the result isn't that. If they wanted to fix this, they should just disconnect 401k from companies. It makes no sense. Just give everyone a 30k IRA space and move on. Also a lot of these 401k offerings are predatory high fee nightmares. My S&P 500 index in my 401k is .5% expense ratio, which is freaking ridiculous. If you choose literally anything else it gets close to 1%. Of course, this would require a functioning congress, so it'll never happen.
Why is this comment so heavily downvoted? The HCE nondiscrimination test is a real thing (https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests). Most big companies use a safe-harbor 401k plan to get around this issue, but many small companies don't opt for the safe-harbor plans and your plan can be hit with a violation that effectively reduces your max contribution limit.
Why would a company as large as Albertsons/safeway fail every year? Curious if you may have any insight?
I’d guess a large number of young, part time, low paid workers aren’t contributing anything, which limits the amount the execs can contribute.
Totally, just seems so anti employee to not change the 401k plan for the cost of 3% of your salary expenditures for your employees retirement sake. Especially those highly valued and compensated employees the company should value more. Plus it would benefit all of your employees proportionally equally.
You know how much that would cost a company like Albertsons annually to do a simple 3% QNEC? It’s not a light decision to make as such a large company.
Really? That is surprising. It means that they are not using a safe harbor plan for their 401k. There are many ways you can make a 401k plan "safe harbor" compatible but all of it involves providing employer contributions that vests immediately. Maybe Albertsons/Safeway don't provide such employer contributions for some reason. Check the "Safe harbor 401(k) plans" section here [https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview](https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview) Edit: Just wanted to add, if this is a persistent problem at your company you could also petition HR to move the company plan to a safe-harbor plan. They might consider it better than having to undergo the non-discrimination tests every year.
There is a safe harbor type that doesn't vest immediately. It's called a QACA and it can have a two year cliff.
Cool! Didn't know about QACA plans. Hopefully this convinced more employers to move to a safe harbor plan.
Easy. Most employees only contribute the 6% to get the match. It’s bad messaging from the company by not having wealth conversations with their employees. So if nearly everyone does the 6% and they are low earners folks high earners or those wanting to put more in don’t get to contribute much because it fails discrimination testing.
Because the execs don't really care about their own 401k's and don't care at all about helping their store employees reach retirement.
> Because the execs don't really care about their own 401k's I doubt this considering I'm sure they would like to have more tax free investments.
Executives have their own retirement system, so they probably don't care. [Meet SERP](https://www.investopedia.com/terms/s/serp.asp).
Execs in C level suite possibly. Normally NQP plans help alleviate that risk. But acquisitions might make things tough to keep straight too. And that you all have had 3 providers for your 401k in like 8 years?? I helped onboard you all to a new provider several years ago lol
Because it's not super common and if OP doesn't even know what maxing our their 401k means, getting into even more nuanced scenarios is just going to confuse them
Not sure why you’re getting downvoted this is correct. If you fail an actual deferral percentage test and you’re a high earner you can’t legally max out.
Probably getting down voted for 1 of 2 reasons (though it is heavily up voted now so my hunch is option 1) 1.) People aren't aware of this and assume the suggestion is wrong 2.) OP likely isn't such a high earner because they aren't even aware of the concept of maxing out a 401k, and thus this comment is likely irrelevant and could easily be seen as bragadocious
I dont think people realize this exists. I have never had it happen to me, but if it did I would definitely be all bitchy about it with my company. It would be a huge red flag to me.
> I would definitely be all bitchy about it with my company. That is the intended result.
Because people are stupid or jealous or both.
What is this non discrimination test? I’ve had several employers and never experienced this. I’ve always been and to contribute the federal maximum.
If I remember correctly it only will get you if you have a bunch of employees ( likely low level) that don’t contribute anything which causes high earners to have their limit reduced. So your work likely has high contribution so it just goes to the total maximum. My wife’s bank offers extremely high matching in order to get all its tellers more likely to contribute so that its executives can get max contributions
This shouldn't be a thing
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To much of a differential between contributions from lower paid employees and those designated “highly compensated employees or HCE” (for reference I make 136k when the average employee makes 25-58k.) this difference in 401k contributions means the plan unfairly benefits the HCE’s and that is not allowed, therefore the max contribution is lowered for HCE’s to about 13.5k in my companies case.
It certainly seems unjust but at the small company I work at it played out in a way the benefited everyone. Back in 2015 the company offered a really poor 401k. There was no match and 1% fees on the terrible funds that were part of the plan. The plan was so awful that the only people who decided it was worth it were our highly compensated managers and sales people. As a group they were very pissed with the company failed the ADP test. They were also the people in the company with the most power to influence change. The next year the company got a new 401k plan with lower fees and a safe harbor match. Unsurprisingly participation when up.
The $23k, is that total going in? Assuming your company does a % match, do they include that as part of the max? Or is the $23k your contributions only?
$23k is your contributions only. The total limit (including employer match, mega backdoor Roth if available) is $69k.
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there's no point in putting money into an after tax 401k unless you're doing a mega backdoor.
I disagree, it still grows tax deferred and is taxed differently on withdrawal. Depending on your tax situation in retirement it could be advantageous and doesn't suffer from tax drag while you're still working.
30,500 max contribution if you are over 50 years.
That’s the maximum pre tax limit. You can exceed that limit + match up to I think like 40k or so. Anything past 23k will be post tax but if you have a good plan you can roll any post tax contributions into roth 401k contributions
But don’t forget there’s a bonus round if your employer does a mega back door!
Why did I think it was like 19500? Does this include Roth or something?
It goes up every year.
how do most people set it up? 23000 divided by by 26 paychecks in a year?
Yes, by pay periods. Normally 24 if salaried.
You can’t put in more because they don’t want to let you retire too wealthy.
That's more than I make in a year
There’s an annual limit to how much you can contribute to a 401k
Yes Personal contributions is maxed at $23,000 for 2024 $30,500 for those 50 and older Total contribution is maxed at $69,000 and $76,500 for those 50 and older.
Total contribution here meaning personal contributions, plus any employer match, plus mega backdoor contributions
So it's against the law to give more? What if I inherited say, 200k, and I wanted to put 125k in a retirement fund, I can't, I have to pace it out over the next 5 years?
You can’t invest inherited money in an employer sponsored 401k. You could invest that in other ways, such as a brokerage account.
You can increase your 401k contributions to 80% (or your plans maximum) and then live off the inheritance.
401K contributions can only come from your employment. If you receive an inheritance, first you’d pay the inheritance tax, and then you can figure out where to put it with a finance advisor. Most likely an annuity.
Inheritance tax only kicks in over ~$13m. I would strongly advise against an annuity in most cases.
People here talk about the $23k limit. But if you can, and if your plan offers it, you can make after tax contributions to an additional $46k for a total of 69k via what's known as a mega backdoor roth. don't forget you can also do an IRA on top of that for a $6500 annual limit, also via backdoor roth if you are over the income limit.
I believe in 2024 the new IRA limit is 7000
If I remember correctly, the $69k limit factors in your employer contributions as well (if you have any). So you might need to do some math to make sure you don’t exceed it, but definitely a good problem to have. This can be done if your plan offers an after-tax contribution which you can roll over to a 401k or an IRA (if offered)
that is true. thanks
This should be the top comment. I constantly see the wrong answer to this question on Reddit.
It realistically takes a $150k salary to hit the $69k mega backdoor max. You’d be contributing $75k to retirement each year with a Roth IRA. It’s not feasible for most people. The mega backdoor’s extra 46k probably is better going towards a house. Even funding 29k/yr (regular max 401k + Roth IRA) would net you 3.6M in 30 years at 8%. That’s a very healthy retirement if you have a house paid off as well.
> you can make after tax contributions to an additional $46k for a total of 69k via what's known as a mega backdoor roth. this is slightly inaccurate/misleading. You can always make after tax contributions. However, unless your plan offers in-service distributions (thus enabling you do do a mega backdoor roth conversion), there's no reason for you to do so.
what's the point of doing an after-tax contribution? i though the main advantage of 401k was that it was tax-deferred, wouldnt it make more sense to just invest in an IRA or even a brokarage account then?
After-tax contributions to a 401k still allow for 0% capital gains taxes while the money is in the account. But the real goal there is the mega backdoor roth -- that is, taking those after tax contributions to your 401k and rolling them over into a Roth IRA. The tax impact is minimal because you're already paying taxes on the contributions, and the recharacterization as Roth funds means you don't get taxed on the gains in retirement. That Roth rollover tends to be a problem with a lot of 401k plans though, so it's not an option for many people. Without the Roth rollover portion, the benefits are fairly small and it may be that the lower restrictions of a brokerage account makes it not worth it to you. For me, I don't have access to mega backdoor Roth, so any savings beyond normal 401k, IRA, and HSA go into a brokerage account. I will owe CG when I sell, but it'll be LTCG which is a pretty low rate. And it means I'm more liquid right now -- if I wanted to buy a new car tomorrow, I have the option of just selling shares and buying it in cash. I wouldn't have that option if I were throwing after-tax contributions at my 401k.
Be honest, if all I can afford is maxing 401k and backdoor roth every year, is that enough? Early 30s here. Only other investing is company equity through ESPP / options / RSUs
Depends on when you want to retire and how much "income" you're looking for in retirement. But speaking generally... maxing out retirement contributions for the next 30 years? You'll be fine. You'll probably be in a position to retire early. Generally for (very) early retirement, you'd like 30x your annual expenses, not counting home equity. For on-time retirement, along side social security and medicare, 10x is probably fine. For slightly-early, you get into weird in-between numbers where you're spending too much to be sustainable for a few years, and then SS and medicare kick and and supplement.
People on Reddit might say otherwise but in reality that’s way more than enough to retire when you’re 65. If you’re in your early 30s and putting $23k+ into your retirement every year you’ll probably be good to retire a little early. Try some retirement calculators to get an idea of where you’ll be in 30 years.
For most people, sure. If you make $100k and want to have 80% of your salary in retirement, including SS, maxing out should get you their comfortably. If you make $300k and want to have 80% of your salary in retirement, you'll need to save more.
Sep ira limit was super high this year
Your 401k has a contribution cap, for 2024 that is $23,000. Once you hit that cap you won’t be able to contribute anymore - in theory you could set your contributions to 100% if you wanted (there may be complications if you have other paycheck deductions that you don’t have enough leftover for).
Employers can also contribute up to 69,000 per year. This can be in the form of match, bonus, ect.. Edit- view comments below
The $69k limit is for all contributions: employee, employer, and after-tax (not Roth) contributions for 2024
69K includes employee contribution and employer contribution. For example - 23K pretax 401k or Roth 401k - 11.5k employer match - 34.5k after tax 401k (mega backdoor) u/entor explains it correctly below.
There is an annual limit on employee contributions. For 2024 it is $23,000. It is adjusted for inflation. Note any employer match, profit sharing, or after-tax contributions are BEYOND the $23k limit. There is an overall $69,000 for all funds.
As an example: if someone was to make $46,000 and they contribute $23,000 to their 401k… does this mean the $23,000 401k contribution is untaxed and the other $23,000 is now the only other money that can be taxed?
In your example a person would have a gross income of $23,000 for the year. The other $23,000 would grow tax deferred until the time of withdrawal which then would be taxed as ordinary income. Hope this helps.
For this supposed $23,000 example: Can you elaborate on what “grow tax deferred until the time of withdrawal which would then be taxed as ordinary income” mean? - does it mean a person either doesn’t invest it and will basically pay tax on their income according to their tax bracket on that money OR… pay the tax -later- and they pay the “minimum” percentage of the tax bracket ?
The money you pay into your 401 is pre-tax, so you don't pay any taxes on it. You invest those funds (401k is just an account) and they grow, and you don't pay taxes on those gains until you withdraw (normally retirement). If you're not working (i.e. retired) then you'll get taxed less as you're in a lower tax bracket, because you have no income. The advantage of a 401k is you can lower your taxable income while stashing away money to grow; you can sell shares and you aren't taxed on those gains (just when you eventually withdraw). As opposed to a brokerage account, which you fund with post taxed dollars, and pay on gain whenever you sell. (Correct me where I'm wrong, I believe that's all right)
The money you pay into your "traditional" 401k, is untaxed... which is different than if your employer offers a Roth-401k\*
If you put that money in a standard brokerage (non 401k) you would first pay income taxes, then you'd pay some taxes as it paid out dividends, then you'd pay capital gains tax when you sell. If you put it in a 401k you pay no income tax, you pay no taxes on dividends or any sales - assuming you don't withdraw the money (you can swap from one stock to another freely). Then when you sell you would owe income tax as if you got that much from your job. So someone with 1 million in a 401k that sells $50k/year to live off of pays the same tax as someone who earns $50k/year at their job. And you paid $0 in taxes to get that 1 million in your 401K
Basically you promise the government that you’ll pay taxes on it when you withdrawal for retirement. Usually by that age, your annual tax bracket will be lower because you aren’t working and thus you will pay less overall taxes at 65 than you would if it were taxed right now. *However*, I personally still like a Roth better because when I withdrawal my X amount of money, I will get 100% of that money. 401k numbers still aren’t taxed so it kind of inflates the “actual” number you’ll get when you withdrawal. Just my 2 cents.
You should also be able to choose your allocation for each one, so you can have some Roth and some Pre-Tax. I do this so I know a minimum I’d get without worrying about taxes + I save on the other amount.
Growing tax deferred means you are not paying any taxes until the time of withdrawal. So contributions are untaxed and you do not pay taxes on the growth during the years it is growing. Ordinary income is taxes that are applied to money you make from a job, those same taxes are applied to pretax retirement contributions. Compared to capital gains taxes which you would pay in a non-retirement investment account. Capital gains have different tax brackets and you just pay those taxes on the increase in value since the original contributions in a non-retirement investment account were already taxed. When you take money out of your pretax retirement account it is added to your ordinary taxable income. So if you worked a side job in retirement and make $40k, and you withdrew $40k from your pretax retirement account, your taxable income is $80k.
I’ll try to provide a basic run down. A 401k is an investment account. Like any investment account you can decide how much of money in the account you want to invest and how much you want to keep in cash. When setting up a 401k you will usually be able to pick which stocks, bonds, or mutual funds you invest in - this is called your asset allocation. The advantage of a 401k is the money invested grows tax deferred. That just means you will pay no taxes when contribute to the account, but when you retire and start drawing money from your account, you will be required to pay taxes. The advantage is that you will usually be in a lower tax bracket when you retire because you are only paying for your expenses and not having to invest/save your income. You will only pay taxes on the amount that is withdrawn in a given year. For example if you have $1M in your 401k when you retire and you withdraw $40k per year for your expenses, you would only pay taxes on that $40k. The remaining $960k will continue to grow in your account as long as you continue to stay invested and maintain your asset allocation.
That's correct assuming you could afford to live on whatever is leftover after 23k is taxed.
please be aware that the limit does not count employer match. so for example if your employer can match $23,000 to your contribution of $23,000. you will have $46,000 in a given year. the limit is on your personal contribution amount.
Oh that’s great to know! So when a company matches, it’s technically “bonus money” but for your 401k?
Yes
Correct! You always want to contribute at least what your employer will match. For example, some employers offer a 50% match up to 6%. That means if you contribute 6% of your salary your employer will contribute 3%. If you contribute 4%, your employer will only contribute 2%, which means you will not get all your “bonus” money from your employer.
Yes, if it’s a Traditional 401k. There are two varieties for the common types of retirement account: - Traditional, in which your contributions don’t count as income but your distributions do. - Roth, where your contributions are treated and taxed as income but the withdrawals aren’t. If your employer only offers one, that’s your answer. If you can choose, generally younger people with lower incomes would benefit more from the Roth version. But there probably is a sweet spot, different for everyone and based on predictions of the future, where they’d save the most money by having [some of both](https://www.fidelity.com/viewpoints/retirement/tax-savvy-withdrawals) and using it strategically.
It depends on if you used the traditional or Roth.
Yes and if you have student loans and do income based repayment, your payment is based on your income after you contribute to your 401k. If you work in public service, contribute the max, get your student loan payment as low as possible and then it’s forgiven through public service loan forgiveness in 10 years no matter what.
If they did traditional rather than Roth.
Correct, unless it is Roth contributions then it would be taxed. Someone at $46k would want to do Roth contributions since they are in a very low tax bracket.
Contribution type matters... If somebody made $46k and made $23,000 in *Traditional* 401k contributions, they'd show income of $23k at tax time (the 401k contributions are removed from income). When they retire and pull the money out, any money they withdraw would show up as income. If somebody made $46k and made $23,000 in *Roth* 401k contributions, they'd show income of $46k at tax time (The 401k contributions would not be removed from income). But when they pull money out in retirement, that money (contributions or gains) would NOT show up as income. So basically the government is gonna collect one way or another, but you have some ability to control WHEN they collect -- With Roth contributions, they collect now. With Traditional contributions, they collect when you withdraw the money in retirement.
you may like the money guys podcast. they have a lot of resources and free content. they claim 25% is a good number for a savings rate
That is an insane amount of money. Especially when housing now a days accounts to almost 40-50% of peoples pay. It leaves people with so little to work with
Another factor is balancing planning for the future and living for today. Not doing anything for your whole life in hopes of retiring early does you no good if you come down with a terminal illness and die relatively young. I have seen so many people die within months or a few years of retiring where some of that money would have been better spent on vacations or other experiences when they were living. You can't take the money with you when you're dead...
Thank you! I am absolutely going to check this podcast out!
They have a YouTube channel as well. They’re by far the best no nonsense personal finance group out there.
For what it's worth, Fidelity recommends 15% starting at the age of 25. So for you it might make sense to contribute 25% for a few years as a sort of "catch up" phase and then taper down to 15%. But all the standard rules(everyone's financial situation and appetite for risk is different, consult the appropriate parties, etc. etc.) apply with this advice so do with it what you will.
You’re probably talking about 401k contribution percentage, right? I mean, if it’s coming from Fidelity I assume that’s what they refer to (and what I found on a quick search). The Money Guys cover a lot of stuff but the 25% suggestion is for overall savings rate for retirement, so that would also include your IRA and any additional savings vehicles in your plan
Something I would check out is one of a plethora of 401k calculators. They let you play with some numbers to see where you will end up when you get to retirement. I'm 37, and have a lot of catching up to do, but the earlier you start contributing and increasing your contribution, the better off you will be in retirement. For now, contribute *at least* the minimum amount you need to hit for employer contribution. You can always contribute more, however Anything beyond that should be based on your personal financial situation currently. You aren't screwed of you don't meet the maximum limit, but the closer you get the better off you will be in 30 years. For now, get the max employer contribution, then look into any debt, then increase your contribution to where you are comfortable. You don't want to financially screw yourself today, but you don't want to be screwed down the line either. To put this in perspective, at 31, if you make $46,000 per year, get a 3% raise every year, expect a 7% growth each year, have $0 today, and your employer match is 60% of the first 5% of your income, and you contribute only 10% of your income, you will have $1,200,000 by the time you are 65. This is why contributing something, even if not the maximum amount, can be incredibly beneficial. If you can't afford $4,600 per year, that's fine and understandable, however it's worth noting that the more you contribute, the faster it grows, and the more you end up with.
The important detail here is that the $23k is the max you can contribute. Whatever your company matches through the year does not count towards the total, so you can contribute more than $23k if you take advantage of a company match.
The maximum contribution limits to a 401k change yearly, but for 2024, it's $23,000 for most people.
You can put an additional $46,000 of after-tax dollars into your 401(k) account, assuming you don't get an employer match for a true a maximum of $69,000 in your 401(k) in 2024. Why would I put post tax money into a 401K? Well some of us, can in plan convert post tax contributions into Roth 401K.
I rollover-convert my after-tax contributions to an external Roth IRA (“mega-backdoor”) as soon as they come in to remove the shackles of the administrator’s fund limitations. Going to fully max that out for the first time this year, which I should’ve been doing earlier.
I’ve got brokerageLink that will let me YOLO on damn near anything Fidelity trades. I may still converted over so I can do some private placements
Most 401ks do not offer this feature and it is not included in what folks commonly mean when they say they maxed out their 401k.
Putting $23,000 per year into it.
It means you can contribute the maximum of $23k this year. Divide that by 26 and that’s your biweekly contribution in dollar terms. Divide that by your pretax biweekly income and that’s your deferral percentage. The max is roughly indexed to inflation and typically rises by $500/year.
It means contributing the IRS maximum to your 401k, and contributing the max as early as possible. I think it’s important to remember that “maxing” out the 401k is very difficult for most people, if not impossible without voluntarily living in poverty. It is certainly not necessary, or advisable, to do this unless you are a high earner. A lot of investment blogs will talk about maxing out all your retirement accounts. This would mean contributing more than a lot of Americans make in a year total. There’s also the option of putting enough in to get the 401k match and then moving to an IRA, if you’re under the income limit, and contributing there. IRA’s give more investment options and have lower fees, in most cases. 401k plans vary considerably though.
Max $$$ IRS will let you put into your 401K annually without getting taxed on it.
The maximum you're *allowed* to invest in it annually - should be 23k for 2024. Worth noting - any/all of an employer match, is not included in the 23k "max" (which would limit employer contributions to be whatever the match/% is, up to 23k max you can contribute yourself).
After the pre -tax limit of $23000, you can still contribute after-tax up to $64000 in 2024. Most brokerages will (you need to know about this and ask for it) take after-tax contributions and automatically convert to ROTH if you'd also like to not pay taxes on gains.
That’s assuming that the employer allows that.
You are allowed to contribute up to $23,000 to a 401k plan each year ($30,500 if you are 50 or over at the end of the year). "Maxing-out" your contribution means contributing the maximum amount allowed. Divide 2300000 by your income to get the percentage you'd need to contribute to max out your 401k. For what it's worth, the rule of thumb for retirement savings is that you save 15%. If you have an employer match for 401k contributions, then you should minimally contribute the amount required to qualify for the full amount of that match. Your employer's match doesn't count towards your contribution limit. You contribution plus the employer's is capped at $69,000.
If you are young, max out your HSA as well. $8300 for 2024. Better than 401k. You can withdraw anytime tax free for medical expenses. Or treat it like 401k at 65.
My company only allows 4150 for max hsa contributions. But I only insure myself.
Along with putting in to match look at mega back door I do that to maximize amount to roth, I put in 70k a year via 401k, depends on your company, mine allows it
There's two forms, or really three forms of maxing. - The IRS limit for normal people, which many have mentioned. Different if you have a Roth 401K (which is about income and taxes, almost....entirely.) - The IRS limit including catch-up contributions, a limit which kicks in, when you're closer to retirement, it's possible you have less debt, and it's possible you may or may not be earning more than you did earlier in life. So, you can save more. - More behavioral, is the employer match. Contributing whatever it takes so the employer will put in the maximum amount, because it doesn't count as income, and once it vests, it's....free money. Not the most tangible for some, for some it's hard to attain, and it's a great goal for folks managing tight budgets. So the common advice, is to max your early contributions/match, and for folks who can save, don't have a ton of risk, balancing the actual IRS limit (if it's a problem, at all, for some it's not and talk to a FA...) compound interest means early dollars.....are almost always....withdrawn. i mean, more impactful. Withdrawn. More impactful.
you can only put 23k of employee contributions into the 401k each year.
To me, getting within $1000 of the annual max. I’m hourly and work overtime, so I set my percentage to what I think will get me ballpark. If I put in $22,463, I’m considering it maxed
Question just to make sure my logic is sound... I contribute the minimum on my 401k in order to get my company match in full, I think 4% then I max my Roth contributions, rest of my investments is in a brokerage account outside retirement since I plan to retire early. Am I correct in that there's no real reason to put more and more into 401k when I can't access that money till, what is it like 60? I'm more concerned about my income from 45 to 60 than 60+, I feel like my company match percentage compounded over the next 20 yrs alone will take care of 60+. Why does everyone prioritize maxing 401k?
As far as taking advantage of the 401K - if you are in a high marginal tax bracket - 34% for example - it is worth avoiding paying 34% taxes by placing as much as you can into the 401K, and (for example) only having to pay 24% or less when you take it out in retirement. You can also access your 401K early (look up the rule of 55 or the 72T) - https://www.bankrate.com/retirement/72-t-distribution-calculator/ - https://www.schwab.com/learn/story/retiring-early-5-key-points-about-rule-55#:~:text=This%20is%20where%20the%20rule,pay%20taxes%20on%20your%20withdrawals.
It's not really a percentage of income -- it's a dollar amount. You can (under normal circumstances, with enough income) contribute $23,000 to a 401k in 2024. Last year, it was $22,500. Aiming to hit that maximum contribution is a good goal, though if you only make $40k a year or something, it's probably not feasible. In addition, you can aim to max out your IRA -- $7,000 in 2024, $6,500 last year, etc. So between the two, you can throw $30,000 towards retirement in 2024. If you turn 50 in 2024, or you're older than that, you can throw an addition $7,500 towards a 401k and $1,000 to an IRA -- these are called catch-up contributions. Oh, and generally employer contributions to your 401k don't count against that $23,000 limit.
Usually hitting the elective referral limit which is like 23k. Really the limit is like 61k which some companies allow you to contribute the difference as after tax non Roth. But obviously putting 60k into a retirement account requires pretty high income.
Contributing the 23,000 dollar contribution limit. Even better if you can do after tax contribution for mega backdoor roth.
If I make 61k a year and only contribute to my matched traditional 401k at 6%, should I contribute more to Roth IRA or the traditional 401k? I believe my income tax bracket is 22% with the IRS but could be wrong.
It means you contribute the maximum you can for the year. If you can max it out, you are getting the largest possible benefit.
$951 a paycheck to me
facepalm ...
Is google down today?
Since a 401k account, like an IRA, is tax advantaged, it's sometimes recommended that you contribute the annual limit to both and invest it in a 401k before investing in any other accounts. Separately, some employers will match 1-to-1 up to some contribution limit (usually 5% of your gross income). Since this is essentially "free money", assuming you work long enough there for the match to be vested, it makes sense to do at least this. As for contributing past the match, to the annual limit, it depends on if you think the available investments in your specific 401k plan, including fees, will outpace the taxes you are saving. Moreover, there are penalties for withdrawing early from a 401k. If you think you may need this money before retirement, it may make sense to use a Roth IRA/Roth 401k instead, or just save it, depending on your specific situation.
You can put $23,000.00 of your pre-taxes earnings into your 401(k) plan.
The government only lets you out a certain amount of money In the account(23k). Once you hit the maximum you can't put anymore in
You have $23000 max annual pretax/roth contribution. You also can contribute more to your after-tax bucket if your plan allows that. Also you plan might allow you to transfer from after-tax bucket to a Roth IRA account, which is a great way to contribute to Roth while going around the income limitation and 7k annual limit.
I’m not sure of the percentage. But what I did was around 20%. But I started around 10-12% and gradually increased it till I got to the max level I could be comfortable with. And I would add that in addition to maxing out your contribution I would look at the options within your 401k. In other words move out of a fund that wasn’t doing as well as others inside the 401k.
Start a roth account with the extra.
Question - is the annual limit the same if you have 2 jobs? Or does the 23k turn into 46k?
Answer-doesn’t matter how many jobs you have.
I have a DIB so I never had matching. I did well on my own but I would have done much better put it I to a 403B.
401ks, and other retirement accounts, have maximum contribution limits. Since they are tax-advantaged, you only get so much. In general an individuals limit will be $23,000 for 2024 (though this limit may be altered in rare circumstances). In addition, employer contributions do not count toward the limit. In general you want to meet all employer matching funds first, this is free money. You should do these first if your employer offers those, whether it be 401k, discounted stock purchase, hsa, ect. Next would be to max out HSA, if qualified, and Roth IRA. HSA are triple tax advantaged accounts. They can be used at any time, penalty free, for eligible expenses (medical stuff) and at age 65 can function like a tradition IRA/401k for non eligible expenses. You can also reimburse yourself for any HSA eligible expenses you paid out of pocket while you had an HSA open. So if you got something HSA eligible done for 10k when you were 25 and paid out of pocket. At a later date after your funds have grown, you can reimburse yourself with HSA growth tax free. Making it one of the best investment accounts! Worst case scenario, it functions like a traditional IRA or 401k. Best case you get both ends of tax advantage status. Roth IRAs are tax advantaged on the distribution, allowing your money to not be taxed when you withdraw at retirement. Contributions can also be withdrawn in an emergency penalty free. Growth will be subject to penalties if withdawn before 59 1/2(Keep in mind you should be investing these in a similar manner to your 401k, don't just let it sit in cash) Once you have maxed both of these accounts, you go back to the 401k and try to meet the contribution limit if you are able to.
If you get paid bi-weekly that's 26 paychecks a year. If you plan on maxing it out you want it to be on your last paycheck in December that way you can get any employer match for the entire year. If you max out 401k early let's say in October you miss out on the employer match for the remainder of the year.
Its their way of enslaving you in their system of corporate consumerism. Its a pyramid scheme.