If your employer offers a 401(k) retirement plan, do yourself a favor and learn more about it. A 401(k) can serve as your wealth-building partner on your retirement journey. It's one of the most common accounts used to boost retirement savings.
The 401(k) benefits for 2022 are even more attractive than they were before. If you're thinking about contributing to a tax-deferred 401(k) or looking for ways to maximize your account, here are three benefits you don't want to ignore.
1. Get extra money from your employer
One of the best perks you can unlock in your 401(k) plan is the company match. Not all employers offer it, but a company match can be a valuable incentive to contribute to a 401(k) plan every year.
Your employer may offer to match a percentage of every dollar you save, up to a certain percentage of your earnings. Let's say your employer matches 50% of your contributions, up to 6% of your salary. If you earn $70,000, your contributions equal to 6% of your salary ($4,200) are eligible for matching. However, your employer only matches 50%, meaning the total matching benefit is capped at $2,100 for the year.
2. Increase your retirement savings
You don't have to limit your contributions to what your employer matches. If you've taken care of your financial obligations, you can tuck away the maximum amount and boost your 401(k) retirement savings.
The IRS increased the 401(k) contribution limits for 2022. Individuals younger than 50 can contribute up to $20,500 in salary deferrals for 2022. If you're over 50, you can max out at $27,000. This is because the IRS grants older individuals a $6,500 catch-up contribution, making it easier to boost your retirement savings in a shorter time frame.
Now that you know the limits, you should start setting savings goals. Set a contribution amount or percentage, and your employer can automatically deduct money from your paycheck. If you receive a bonus at work, you can add that extra money to your 401(k) pot.
3. Lower your tax bill
If you're looking to trim your current year's tax bill, your 401(k) might be your saving grace. Every dollar set aside in a tax-deferred account grants you an up-front tax deduction. Your contributions to a 401(k) are pulled from your paycheck before federal and state income taxes are withheld. This lowers your taxable income for the year.
Let's say your annual salary is $80,000 and you're in the 24% tax bracket. If you contribute the maximum amount -- $20,500 in 2022 -- for people under 50, your total taxable income for the year becomes $59,500. At a 24% tax rate, your 401(k) contribution shrinks your tax bill by $4,920.
Enjoy the benefits while you can
The government allows companies to offer 401(k) packages to their employees. However, all the benefits you see right now may not last forever. Your employer may stop matching contributions, or the maximum amount of money you're allowed to set aside every paycheck may change. It's important to do your research now and determine if a 401(k) fits into your master retirement plan.
After you've committed to contributing to a 401(k), it's time to create a game plan. Find ways to increase your savings and contributions so that you don't leave any benefits on the table.