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3 Ways to Maximize Your 401(k)

By Katie Brockman – Jun 8, 2020 at 8:00AM

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Make the most of your 401(k) to boost your retirement savings.

When it comes to saving for retirement, your 401(k) is one of the most powerful tools available. Many workers aren't taking full advantage and are missing out on valuable opportunities to save more.

To save as much as possible, you'll need to maximize your 401(k). Here are three of the best ways to do that:

Woman putting coin into piggy bank

Image source: Getty Images.

1. Contribute enough to earn the full employer match

Approximately 95% of 401(k) plans offer employer contributions, according to a 2019 report from Vanguard. Employer contributions -- specifically, matching contributions -- can potentially double your savings. So if you're not taking full advantage of them, it's time to start.

For example, your plan offers to match your 401(k) contributions dollar for dollar up to 3% of your salary. If you're earning an annual salary of $50,000, that's a match of $1,500 per year. In other words, you could potentially earn up to $1,500 per year in free money simply by contributing 3% of your salary to your 401(k). If you're not contributing enough to earn the full employer match, you're missing out on the opportunity to effortlessly boost your retirement savings.

2. Avoid making withdrawals

Approximately 52% of Americans have tapped into their retirement funds early, a survey from MagnifyMoney found. When you have a large stash of cash just sitting in your retirement account, it can be tempting to dip into it when money is tight. However, raiding your 401(k) can result in lasting consequences.

In the short term, you could be slapped with a 10% penalty on top of the income taxes paid if you dip into them before age 59 1/2. Under the CARES Act, the 10% penalty is temporarily waived if you're withdrawing to pay for coronavirus-related expenses, but you'll still pay income taxes. If you withdraw a significant amount or make repeated withdrawals, those penalties and taxes can compound the losses.

Over the long term, withdrawing from your 401(k) will make it harder for you to save as much as you should. Your savings need as much time as possible to grow, so if you're taking money out of your retirement account -- whether you make just one or consistent withdrawals -- you're making it more difficult for your money to grow.

3. Be careful about 401(k) loans

If you desperately need money but don't want to withdraw cash from your retirement fund, you may be eligible to borrow cash from your 401(k) instead. This is often a better option than withdrawing because when you take out a 401(k) loan, you're forced to repay the loan with interest -- which just goes straight back into your account. When you have to repay what you borrow, you're more likely to keep your retirement savings on track.

However, there are risks involved in taking a 401(k) loan. For one, if you leave your job (whether it's voluntary or you lose it for any reason) while you have an outstanding loan, you'll likely need to repay the loan in full immediately, or it will be subject to normal withdraw penalties and taxes.

Additionally, 401(k) loans can still hurt your ability to save long term. Although you're paying the money back, you're still taking your savings out of your 401(k). That's money no longer growing in your account, which means you're missing out on possible investment gains. It will be easier to get back on track once you repay your loan, but even then, you've set your savings back a step.

Your 401(k) is one of the most powerful tools in your retirement toolbox, so it pays to ensure you're making the most of it. By maximizing your contributions and letting your money grow for as long as possible, you can build a healthy nest egg for retirement.

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