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5 Ways to Squeeze Every Last Penny Out of Your 401(k) Plan

By Adam Levy – Sep 30, 2021 at 7:30AM

Key Points

  • Save as much as possible with your 401(k) plan with various contributions.
  • Use it to optimize your taxes by maximizing your credits and minimizing your liability.
  • Take more control of your retirement savings by rolling funds into or out of a 401(k) plan.

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Make the most of everything your employer's 401(k) plan offers.

If your employer offers a 401(k) plan at work, you should know that it offers one of the best ways for you to save for retirement. No other retirement account option offers the ability to save more money in a tax-advantaged way.

But are you taking full advantage of everything your 401(k) can do? Here are five ways you can get the most out of your 401(k) plan.

An envelope labeled 401k stuffed with $100 bills.

Image source: Getty Images.

1. Max out that match

Most employers offering a 401(k) plan include a company match as an added benefit. If you're not already maxing out the company's matching contribution on your 401(k), you should prioritize it above all other savings goals.

Employers typically provide a matching contribution for up to a certain percentage of your salary, either dollar-for-dollar or $0.50-on-the-dollar. If you don't know the details of your company's 401(k) contribution matching policy, contact your HR department and ask.

You'll also need to be aware of any vesting schedule for those employer contributions. If they don't vest immediately, you'll need to stay with the company for a specific period in order to keep all the money. If you plan on a career switch in the near future, and your company's vesting schedule is a long time, it's one instance where trying to max the match might not make financial sense.

2. Optimize your taxes

401(k)s have relatively generous tax-deductible contribution limits: $19,500 in 2021. Being able to put that much in a tax-advantaged account can give a lot of people more control over their annual tax situation. You can make contributions to a tax-deferred account in your 401(k), and many employers now also offer a Roth 401(k) account option. That gives you added flexibility on your yearly tax situation.

Instead of passively waiting for your accountant to tell you how much you owe every April, take the time to do some tax planning and figure out the best way you can save.

If you're already in a high tax bracket and live in a state with high income taxes, maxing out your tax-deferred account can really help your tax bill. Additionally, tax-deferred 401(k) contributions can lower your adjusted gross income, which can help you qualify for additional tax credits such as the child tax credit, saver's credit, or Affordable Care Act (ACA) credit. That can make for substantial tax savings on your contributions.

3. Knock on the mega-backdoor

If your employer plan allows it, the mega-backdoor Roth IRA is one of the best ways to save extra for retirement. In order to execute the mega-backdoor, your plan must allow additional after-tax contributions and in-service withdrawals. Ask your human resources department if it's possible.

Instead of withdrawing the after-tax funds to a Roth IRA, it may also be possible to convert them within the plan to a separate Roth account.

If your plan allows the mega-backdoor Roth, you can contribute as much as $38,500 in additional funds to a Roth retirement account. Those funds will grow tax-free, and you'll be able to withdraw them tax-free in retirement. While this tactic still works in 2021, Congress is looking to pass legislation that would close the backdoor. So, take advantage of it while you still can.

4. Access your retirement funds early

The standard age for withdrawing from retirement accounts without penalty is 59 1/2. But 401(k)s have a special rule, the rule of 55, that allows you to start taking distributions if you leave your employer starting in the calendar year you turn 55.

You can use that rule to access all of your retirement funds early. If your plan allows it, you can roll in any IRAs you have or other 401(k)s. Then, when you separate from service, you can start taking withdrawals immediately, assuming you turn 55 or older that year.

It's worth noting that you'll need to keep the funds in the 401(k) plan, at least until you turn 59 1/2. If the fees are too high, it might not be worth keeping all of your money there instead of a fee-free IRA. There are ways to tap your IRA early, too, so be sure to compare all your options.

5. Roll it over

401(k) investment fees can really eat into your retirement savings. Therefore, you'll most likely want to get your funds out of your 401(k) plan as soon as you can. Rolling over an old 401(k) into an IRA can get rid of the fees. IRAs also generally have more investment options than most 401(k) plans.

However, if you take advantage of the backdoor Roth IRA (not the mega-backdoor), rolling over tax-deferred funds into an IRA isn't your best choice. Doing so will force you to pay taxes on a large percentage of your Roth conversions due to the aggregation rule, and it ruins the practicality of the backdoor Roth. In that situation, rolling over into another 401(k) or leaving it be is best.

Take advantage of everything you can

You might not be able to take advantage of all the tactics listed above. Hopefully, you can use one or two right away and keep the others in the back of your mind for when they're applicable. Making the most of all your 401(k) plan offers is one of the best ways to set yourself up for retirement.

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