When you Should Max Out Your 401(K)

401(k)

Should you Max Out Your 401(K)?

A lot of times you will hear “save for retirement. It will be worth it!” Making decisions on your retirement accounts can an important financial decision. A lot of personal finance experts will say that saving between 10 to 20 percent of your income through your career is a good place to start.

Sometimes contributing up to the maximum amount ($18,500) possible for 401(K) sounds ideal, however it’s not the right approach for everyone. It really depends on the position you are in. You may not have excess cash flow to make this happen, which is completely understandable.

The idea of a retirement plan is to set aside money for the future and still be able to meet your needs for living. For example, if you have high debt in credit cards, student loans, or not enough saved up emergency accounts, you should focus on these before trying to max out your 401(K).

When considering maxing out your 401(K) you should consider the following milestones before doing it:

  • 3 to 6 months of savings for basic living expenses
  • Life insurance coverage
  • Pay off any high interest credit card debt, student loans, car loans
  • Disability insurance
  • Trusts/Wills planned out
  • Health savings account

If your company does not match, you should still contribute to your 401(K). Your 401(K) contributions are automatic into your account. You don’t have the hassle of having to transfer money or write a check. 401(K)’s also has lower taxable income. When you contribute, the invested money has not yet been taxed. That said, investing in your 401(K) provides savings growth without being taxed. When you make withdrawals, you do get taxed. However, it can be possible at a lower tax rate if the tax bracket is lower in retirement when you are ready to withdraw.

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