How to Maximize Your Retirement Savings Contributions Each Year
It’s the beginning of your career, and you finally get to enjoy a steady income – the last thing on your mind is your retirement savings. You may feel like retirement is so far in the future. Why would you ever have to start thinking about it now?
But it’s essential to think about retirement from early adulthood so that you can provide yourself with flexibility in saving and making meaningful investments. Your long-term investments will pay out significantly as you roll your earnings into the principal investment and watch your money multiply.
Dive into the following topics to gain a better knowledge of the importance of making maximum retirement contributions:
- Understand the Contribution Limits
- Take Advantage of Employer Contributions
- Use Catch-Up Contributions
- Consider a Health Savings Account
- Automate Your Savings
- Reduce Your Taxes
- Consider Working with a Financial Counselor
Understand the Contribution Limits
Each retirement savings account has different contribution limits. This means that they put limits on how much money you can pay to the investment account each year. Investing the maximum amount means taking advantage of the investment benefits and full opportunities offered. There are different types of savings accounts with specific limits and regulations:
- 401(k): Employee contributions for 401(k) plans have a limit of $22,500 for 2023. When you contribute the full amount, that money is protected from taxes and saved up for retirement.
- IRA and Roth IRA: Annual contributions to IRAs are capped at $6,500 for 2023. For these accounts, you manage your own IRA, and the money will not be taxed until it is time to withdraw the funds.
Enjoy the tax benefits on your retirement savings when you contribute the full amount to your accounts. There is no reason to pay taxes on money that will not be used for decades. Carefully choose your retirement savings accounts, considering contribution limits and employee benefits. This knowledge will significantly influence your retirement savings strategy.
Take Advantage of Employer Contributions
Along with maximizing your contributions, many employers will match your 401(k) contribution up to 5%. Wow, that means that employers put money toward your retirement on top of your salary.
Increase the amount you put into your retirement account so that you can get even more from your employer. This will pay off big time when retirement comes.
Another way that employers will pay toward your retirement fund is through a profit-sharing model. As you work with the best interest of the business in mind, you will receive a part of the business profits straight into your retirement. Set yourself up for retirement success by taking advantage of employer contributions.
Use Catch-Up Contributions
Advance in age to reach age 50, and suddenly, reality hits. Do you have enough saved for retirement? Catch-up contributions are allowed after age 50 for those who failed to save enough when they were younger or for those who want to save even more.
Instead of following the regular contribution limits, you can contribute more to increase your retirement savings in a pinch. For 401(k) plans, you can contribute $7,500 on top of the annual limit of $22,500. And for IRAs, add $1,000 to the annual contribution limit of $6,500 if you are eligible for catch-up contributions.
While it seems like a small increase, these catch-up contributions can give you 15 extra years of increasing the principal investment amount to allow for compounding savings. While it is not recommended to start saving at age 50, fill in the gap as much as possible by maximizing your catch-up contributions.
Often, you make the most money of your lifetime at the tail end of your career. When you put more money into retirement funds, you do not have to pay taxes on that part of your income until you withdraw it later. Use catch-up contributions to maximize tax savings.
Consider a Health Savings Account
Health Savings Accounts are separate from retirement savings accounts. Instead of dipping into your retirement to pay for medical bills when it is meant to be for living expenses, you can contribute to your HSA to save up for future medical expenses.
The money you save in an HSA account cannot be taxed. After retirement, you can use the money to pay for Medicare premiums and out-of-pocket expenses. It’s important to max out your contributions for HSA now because you will no longer be able to contribute once you enroll in Medicare.
HSA accounts are triple tax advantaged. The money you pay into the account is not taxed. The money you withdraw from the account for medical expenses is not taxed. And any interest or investment growth in the account is not taxed. Use HSA accounts to enjoy tax benefits and have a reserve to turn to when unexpected health complications arise.
In order to contribute to an HSA account, you must be enrolled in an insurance policy with a high deductible. Contribute up to $3,850 annually for individuals and $7,750 if you are enrolled in a family coverage plan.
In the same way that you use retirement savings accounts for tax benefits and as a surefire way to save for retirement, you can use HSA. Save up for a rainy day when health troubles occur. And as a bonus, you can experience tax savings along the way.
Automate Your Savings
Set up automated savings to contribute to your retirement before you consider that money as spendable income. Instead of mourning the amount of money you put into your retirement savings each month, set up automated savings so that you never feel tempted to spend it.
It’s okay if you are not a disciplined saver. It can be hard to save money when there are so many luxuries awaiting your enjoyment. But when you maximize retirement savings contributions and set up automated transactions, you can work with a budget that allows for spending here and there while responsibly saving for the future.
Automated savings keep your retirement funds consistently growing. And they provide convenience to your life so that months do not pass by without deposits into the retirement accounts due to forgetfulness. Here are some tips to consider:
- Set up automatic payments and never include that money in your budget for living expenses.
- Think of the payments as compensation to your future self for a beautiful, enjoyable retirement.
- Reevaluate each year to increase payments according to changing contribution limits.
- Check in on your cash to ensure it grows at a competitive investment rate.
- Automate debt payoffs to reap some of the same benefits by investing in more freedom for your future.
Reduce Your Taxes
Reduce your taxes by contributing to retirement savings accounts. The money is tax-free, meaning you get to pay less in taxes each year because a portion of your income goes into retirement funds. You will have to pay taxes eventually at the time of withdrawal. But in the meantime, your tax-free money will increase as you invest and multiply the money in your retirement accounts.
Use retirement savings and HSA accounts to benefit from a portion of your income being tax-free. Over the years, you will save thousands in taxes and enjoy the benefits of growing retirement accounts.
Maximize contributions for 401(k) plans, HSA accounts, and IRAs to enjoy $30,000 or more tax-free dollars of your annual income. When you hit age 50, max out on catch-up contributions to save even more money on taxes. If you do all this and avoid taxation on early withdrawals, you will protect a chunk of your income from yearly taxes.
Consider Working with a Financial Advisor
A financial advisor has expertise in planning for retirement and helping people make sensible investments along the way. A financial advisor is educated, qualified, and ready to keep track of your retirement accounts and pivot with necessary changes in the economy.
Work with a financial advisor for guidance through your investment strategies and maximizing your retirement funds. If you are a late starter to saving for retirement, a financial advisor will help you get caught up, so there is no need to panic.
Choose a financial advisor that is communicative, knowledgeable, and respectful of your risk tolerance. Ask the hard questions to see if your investment strategies align as you work to meet your long-term financial goals.
No matter when you start saving for retirement, the time will arrive when you stop working and need income to pay for day-to-day expenses. It is never too late to start saving!
Maximize your retirement and catch-up contributions to ensure comfort and low stress during your retirement years. A financial advisor can always help you achieve your long-term financial goals.