Your future self will be glad you took the time to take these important actions now.
One of the best things about 401(k)s is their high annual contribution limits. You can save up to $23,000 in 2024, or $30,500 if you’re 50 or older. These limits will likely increase in the future to adjust for inflation. Because of this, you can save more than $1 million in your 401(k).
What’s more difficult is actually getting it done. Most people can’t afford to max out their 401(k), and some can’t even make regular contributions to the account. But by 2025, you can increase your chances of becoming a 401(k) millionaire by taking these three steps.
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1. Claim as much of your 2024 401(k) match as possible.
A 401(k) match is additional money that you can put toward your retirement savings, but you typically have to make personal contributions to your 401(k) to earn it. December 31st is the deadline for 2024 401(k) contributions, so you’ll need to act quickly if you have any unclaimed matches remaining.
If you’re not sure how much you’ve already contributed to your 401(k) this year, or how much you need to contribute to get an exact match, talk to your company’s human resources department or 401(k) plan administrator. Then divide the remaining total amount by the number of payment periods remaining in the year. To earn this extra cash, aim to accumulate as much as possible by 2025.
There is one caveat for those who have only been with their employer for a short period of time and plan to retire soon. You may not be fully subscribed to this plan. This means you could lose some or all of your 401(k) match when you retire. In this case, you may want to stash your extra savings in an IRA instead. This gives you more control over your investments and the fees you pay.
2. Look for opportunities to reduce costs
When it comes to fees, you want to pay as little as possible as they can eat into your profits. Although you don’t have much say in the management fees charged to your plan, you do have some control over investment fees.
You will often invest in funds (bundles of investments that you buy as a package) that have an expense ratio. This is an annual fee paid to the fund manager stated as a percentage of assets. For example, if your expense ratio is 1%, you pay the fund manager $1 per year for every $100 you invest in the fund.
You can learn more about a fund’s investment fees by reviewing its prospectus. This should be kept below 1% whenever possible.
If you’re paying more than you’d like, consider whether you can move at least some of your money into more affordable investments. For example, you can switch from a target date fund that charges a 0.5% fee to a lower-cost index exchange traded fund (ETF) that charges a 0.03% fee. That way, you’ll save $47 for every $10,000 you invest in the fund each year.
3. Plan your strategy for 2025
Now is also a good time to plan your retirement savings strategy with an eye toward 2025. If you qualify for the match, it makes sense to put money into your 401(k) first. By making regular contributions throughout the year, you increase your chances of getting an exact match.
You should also weigh the pros and cons of a traditional 401(k) and a Roth 401(k) if you have access to both. Traditional 401(k)s offer upfront tax breaks, which can be valuable if you’re currently in high taxes. With a Roth 401(k), you have to pay taxes on your contributions this year, but you can withdraw the funds tax-free after that, if you expect your tax bracket to stay the same or go down. more suitable. .
Keep in mind that even if you contribute to a Roth 401(k), the employer match can still be tax-deferred. Additionally, your total 401(k) contributions in a year cannot exceed the annual contribution limit. This will be $23,000 for adults under 50 and $30,500 for adults 50 and older in 2024. These limits may be slightly higher next year, but the IRS has not yet released the 2025 rules.
Looking ahead to next year, you may need to adjust your retirement savings strategy, especially if you’ve changed jobs. But make sure to make regular contributions whenever possible and update your retirement plan accordingly to stay on track.
