Maximize Your Future: Unlocking the Power of 401(k) Contributions for a Secure Retirement
When it comes to planning for retirement, the 401(k) is one of the most powerful tools at your disposal. Introduced in the late 1970s, this employer-sponsored retirement plan has since become a cornerstone of American retirement savings. At its simplest, a 401(k) plan allows you to make pre-tax contributions that accumulate over time and can be invested in various vehicles to grow tax-deferred until they’re withdrawn in retirement. From ensuring your income needs are met following your working years, to building and securing a nest egg of assets to pass along to the next generation, the employer sponsored 401(k) and its additional features are meant to add substantial value, and build confidence, peace of mind, and enjoyment in retirement.
In this three part series, we’ll explore not only the benefits of a 401(k) plan, but also the potential advantages of having your 401(k) professionally managed, as well as share tips on how to best optimize your 401(k) plan for a comfortable, fulfilling, and secure retirement.
Let’s start with the benefits of a 401(k) Plan
1. Tax Advantages
One of the biggest benefits of a 401(k) plan is the tax advantaged status it offers. Contributions to a traditional 401(k) are made pre-tax, which means they reduce your taxable income. Reducing your taxable income can lower your tax bill in the year you contribute. Additionally, the money in your 401(k) grows tax-deferred, meaning you won’t pay taxes on the earnings until you withdraw them during retirement - in other words, the taxes are deferred. If you opt for a Roth 401(k), contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
2. Employer Match
For many individuals, your employer may offer a matching component to contributions that you, as an employee, make to your 401(k) plan. This is essentially free money that can significantly boost your retirement savings over time. For example, if your employer matches 50% of your contributions up to the first 6% of your salary, you’re receiving an instant 50% return on that portion of your investment.
Take, for example, our hypothetical employee, Henry. Henry’s pre-tax salary, working for Great Company, is $100,000. Great Company has an employer matching component of 50% of Henry’s contributions, up to 6% of his salary. Henry plans to contribute 10% of his salary ($10,000) to his 401(k) in 2024. The first 6% of Henry’s salary is $6,000 ($100,000 x.06), of which Great Company will match 50%, aka an additional $3,000 of employer contributions on top of Henry’s original $10,000, totaling $13,000.
These employer contributions are free additional dollars, on top of your contributions, and can quickly accumulate to substantial amounts over time. We recommend communicating with your employer, or your financial advisor, to best understand your employer match percentage, and match maximum, to best optimize your 401(k) account for your retirement goals and needs.
3. Automated Savings
A 401(k) plan allows you to automate your retirement savings. Contributions are automatically deducted from your paycheck, which means you’re consistently saving without needing to think about it. This automation is a powerful tool to ensure you’re regularly setting aside money for the future. Your periodic investments (contributions) into your down the line retirement lifestyle happen in the background, giving you time and energy to focus on other important things.
4. Higher Contribution Limits
Compared to other retirement accounts, 401(k) plans have relatively high contribution limits. In 2024, for instance, you can contribute up to $23,000 if you're under 50, and $30,500 (an additional $7,500) if you’re 50 or older via the ‘catch up’ provision. These higher limits allow you to build a substantial nest egg over time. These limits also vary, depending on your age (e.g. the catch up provision), and current legislation.
For example, beginning in 2025, the SECURE 2.0 Act of 2022 increases the catch-up contribution for individuals aged 60 to 63 to 50% of the standard contribution limit.
This can be an incredibly powerful milestone, utilized in your proactive retirement planning, to best optimize your 401(k) contributions and catch up provisions.
For self employed individuals, the Self Employed 401(k)-sometimes called a solo-401(k), or individual 401(k), is the same option for small-business owners with no employees (outside of a spouse). For these plans, you are subject to the same maximum (up to $23,000 if you're under 50, and $30,500 (an additional $7,500) if you’re 50 or older). In addition, as Employer, you can contribute up to 25% of your compensation each year.
Total contributions to a participant’s account cannot exceed $69,000 for those under 50. For those age 50 and over, including catch-up contributions, totals cannot exceed $76,500 for 2024.
Together, those contributions can add up to significant annual savings!
Note: Contributions can also potentially qualify for added tax breaks. Talk with your financial advisor and tax professionals to explore if your contributions qualify for potential deductions.
This is part of a three part blog series on preparing for retirement. Learn more about optimizing your 401(k) for a secure retirement.
Meet
Brian Mills
Hi there 👋🏾, I'm Brian and I am dedicated to wealth management customized to target asset protection and growth. My experience lies in providing personalized solutions for diversifying and safeguarding portfolios to address market risks.
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth, Inc. (“Savvy Wealth”) is a tech company and the parent company of Savvy Advisors, Inc, (“Savvy Advisors”). All advisory services are offered through Savvy Advisors, Inc., an investment advisor registered with the Securities and Exchange Commission (“SEC”). For the purposes of this blog article, Savvy Wealth and Savvy Advisors may be referred to together as “Savvy”.
Maximize Your Future: Unlocking the Power of 401(k) Contributions for a Secure Retirement
When it comes to planning for retirement, the 401(k) is one of the most powerful tools at your disposal. Introduced in the late 1970s, this employer-sponsored retirement plan has since become a cornerstone of American retirement savings. At its simplest, a 401(k) plan allows you to make pre-tax contributions that accumulate over time and can be invested in various vehicles to grow tax-deferred until they’re withdrawn in retirement. From ensuring your income needs are met following your working years, to building and securing a nest egg of assets to pass along to the next generation, the employer sponsored 401(k) and its additional features are meant to add substantial value, and build confidence, peace of mind, and enjoyment in retirement.
In this three part series, we’ll explore not only the benefits of a 401(k) plan, but also the potential advantages of having your 401(k) professionally managed, as well as share tips on how to best optimize your 401(k) plan for a comfortable, fulfilling, and secure retirement.
Let’s start with the benefits of a 401(k) Plan
1. Tax Advantages
One of the biggest benefits of a 401(k) plan is the tax advantaged status it offers. Contributions to a traditional 401(k) are made pre-tax, which means they reduce your taxable income. Reducing your taxable income can lower your tax bill in the year you contribute. Additionally, the money in your 401(k) grows tax-deferred, meaning you won’t pay taxes on the earnings until you withdraw them during retirement - in other words, the taxes are deferred. If you opt for a Roth 401(k), contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
2. Employer Match
For many individuals, your employer may offer a matching component to contributions that you, as an employee, make to your 401(k) plan. This is essentially free money that can significantly boost your retirement savings over time. For example, if your employer matches 50% of your contributions up to the first 6% of your salary, you’re receiving an instant 50% return on that portion of your investment.
Take, for example, our hypothetical employee, Henry. Henry’s pre-tax salary, working for Great Company, is $100,000. Great Company has an employer matching component of 50% of Henry’s contributions, up to 6% of his salary. Henry plans to contribute 10% of his salary ($10,000) to his 401(k) in 2024. The first 6% of Henry’s salary is $6,000 ($100,000 x.06), of which Great Company will match 50%, aka an additional $3,000 of employer contributions on top of Henry’s original $10,000, totaling $13,000.
These employer contributions are free additional dollars, on top of your contributions, and can quickly accumulate to substantial amounts over time. We recommend communicating with your employer, or your financial advisor, to best understand your employer match percentage, and match maximum, to best optimize your 401(k) account for your retirement goals and needs.
3. Automated Savings
A 401(k) plan allows you to automate your retirement savings. Contributions are automatically deducted from your paycheck, which means you’re consistently saving without needing to think about it. This automation is a powerful tool to ensure you’re regularly setting aside money for the future. Your periodic investments (contributions) into your down the line retirement lifestyle happen in the background, giving you time and energy to focus on other important things.
4. Higher Contribution Limits
Compared to other retirement accounts, 401(k) plans have relatively high contribution limits. In 2024, for instance, you can contribute up to $23,000 if you're under 50, and $30,500 (an additional $7,500) if you’re 50 or older via the ‘catch up’ provision. These higher limits allow you to build a substantial nest egg over time. These limits also vary, depending on your age (e.g. the catch up provision), and current legislation.
For example, beginning in 2025, the SECURE 2.0 Act of 2022 increases the catch-up contribution for individuals aged 60 to 63 to 50% of the standard contribution limit.
This can be an incredibly powerful milestone, utilized in your proactive retirement planning, to best optimize your 401(k) contributions and catch up provisions.
For self employed individuals, the Self Employed 401(k)-sometimes called a solo-401(k), or individual 401(k), is the same option for small-business owners with no employees (outside of a spouse). For these plans, you are subject to the same maximum (up to $23,000 if you're under 50, and $30,500 (an additional $7,500) if you’re 50 or older). In addition, as Employer, you can contribute up to 25% of your compensation each year.
Total contributions to a participant’s account cannot exceed $69,000 for those under 50. For those age 50 and over, including catch-up contributions, totals cannot exceed $76,500 for 2024.
Together, those contributions can add up to significant annual savings!
Note: Contributions can also potentially qualify for added tax breaks. Talk with your financial advisor and tax professionals to explore if your contributions qualify for potential deductions.
This is part of a three part blog series on preparing for retirement. Learn more about optimizing your 401(k) for a secure retirement.
Meet
Brian Mills
Hi there 👋🏾, I'm Brian and I am dedicated to wealth management customized to target asset protection and growth. My experience lies in providing personalized solutions for diversifying and safeguarding portfolios to address market risks.
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth, Inc. (“Savvy Wealth”) is a tech company and the parent company of Savvy Advisors, Inc, (“Savvy Advisors”). All advisory services are offered through Savvy Advisors, Inc., an investment advisor registered with the Securities and Exchange Commission (“SEC”). For the purposes of this blog article, Savvy Wealth and Savvy Advisors may be referred to together as “Savvy”.
