401(k) power


Perhaps I’ve been spending too much time with my young kids, but I’ve gotten to be quite good at wagging my finger and speaking in a stern, fatherly voice.

I love my kids dearly, but at times the rascals need a little discipline.

And chances are, when it comes to making full use of your 401(k) plan, you do too.

If you’re not taking full advantage of your 401(k) plan… well, shame on you. Those things aren’t free, you know.

 

savings

 

Tax Hit

Your employer spends a lot of money administering the thing for your benefit.

At my first job, we didn’t have 401(k) plans. I had to settle for the measly $2,000 I was allowed to contribute to an IRA at the time. Well, I maxed out that IRA… and I loved it!

If you’re in the 28% tax bracket – and if you’re still single , you’re in the 28% bracket at an income of just $91,150 – then you effectively earn a 28% “return” on every dollar you contribute, as of day one.

 

Get Going

You can save $18,000 in a 401(k) plan in 2017. If you get started now, that’s $692 per paycheck. Your grandmother used to feed a family of 7 growing kids on $692 per year and never complained.

So stop your whining, log in to your plan or call your HR department now and get your contributions on track.

Don’t even get me started on matching.

Matching Power

These days, I’ve seen companies match as much as 6% or 7%. If you’re too big of a sissy to contribute the full $18,000 in salary deferral to your 401(k) plan, then for crying out loud, at least contribute enough to get the full matching amount from your employer.

If you don’t, you’re leaving money on the table.

If you’re not already maxing out your 401(k) plan for the full $18,000 (or $24,000 if you’re 50 or older) you should really make that a priority. Even if the stock market fails to return a single red cent, the tax savings and employer matching alone make it more than worthwhile.

 

Stay Disciplined

I realize that not everyone can realistically defer $18,000 of their annual pay. If you’re young, recently started a family or have a non-working spouse, that might not be an attainable goal. But here are a few tips to get you closer.

If you got a raise to start the year, I strongly encourage you to allocate the difference to your 401(k) plan. You were already surviving at your previous pay rate; continue to live your current lifestyle a little longer, and push the salary increase into your retirement plan. Years from now, you’ll be happy you did.

If you generally get large tax refunds every year, consider chatting with your HR department about increasing the number of exemptions you claim.

This will cause you to withhold less in taxes, which will boost your paychecks. You can then use higher effective pay to contribute more to your 401(k) plan.
 
Photo Credit: Tax Credits via Flickr Creative Commons

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Charles Sizemore
Charles Sizemore
Sizemore Capital Management LLC is a registered investment advisory firm located in Dallas, Texas. Charles Lewis Sizemore, CFA is the founder and Chief Investment Officer of the firm.