There's a reason some savers prefer housing their retirement funds in a 401(k) over an IRA. With a 401(k), there's often (though not always) the potential for free money in the form of an employer match. And also, 401(k) plans have higher annual contribution limits than IRAs, so there's more opportunity to sock money away for retirement in a tax-advantaged fashion.
This year, 401(k) plans max out at $22,500 for savers under the age of 50 and $30,000 for those 50 and over. IRAs, by contrast, max out at $6,500 for savers under 50 and $7,500 for those 50 and older. But a recent CNBC survey found that only 11% of savers manage to max out their 401(k)s.
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Now given these higher limits, that's understandable. But clearly, being able to max out a 401(k) could do a lot of great things for your future finances. So if that's something you're eager to do, a few savvy choices could make it possible.
When you're willing to make some sacrifices
Some financial experts will claim that cutting back on small luxuries like store-bought coffee and takeout orders could make it possible to build up a sizable retirement nest egg. But let's be real -- you can't home-brew your way to a $22,500 or $30,000 annual 401(k) contribution.
If you're close to being able to max out, then yes, busting out your coffee maker versus heading to a coffee shop every day might help push you toward your goal. But if your overall expenses are such that you can only afford to put $5,000 a year into your 401(k), then making coffee at home isn't going to get you to $22,500 or $30,000. Neither is ditching your one weekly takeout order, canceling your gym membership, or slashing similarly modest expenses.
If you want to be in a position to max out your 401(k) and you're not a mega-high earner, then your best bet is really to keep your largest expenses down. That means not taking on a huge mortgage, and spending minimally on a car rather than springing for an $900 monthly payment.
Sure, giving up small luxuries could spell the difference between being able to fund a 401(k) versus not saving anything for retirement at all. But if you're an average or even moderately high earner, then keeping your housing and transportation costs low is probably your best shot at maxing out your employer-sponsored retirement plan.
If you spend $1,200 a month on a mortgage when you can really afford $2,700, and you spend $525 on a car payment instead of $900, that is $1,875 a month. And that's what it takes to max out a 401(k) if you're under 50.
It's all about setting priorities
For some people, the idea of living in a smaller home or driving a less luxurious car isn't appealing. And you know what? It's OK if you feel that way as long as you're saving a decent chunk of money for retirement. Maxing out your 401(k) is by no means your only option.
But if you want to max out your 401(k), keep those larger expenses down. Your future self will thank you for it.
