Your 401(k) can be an incredibly powerful tool for saving for your retirement. Between the automatic contributions from your paycheck, the possibility for an employer match, the tax benefits, and the fairly high annual investment limits, 401(k)s are very tough to beat.
Yet there is one key drawback to a 401(k) plan: Money in your 401(k) must be contributed directly from your paycheck, and it must be in the plan by December 31 to count as a contribution for 2023. As a result, time is running out. You must contribute to your 401(k) by the end of this year to have the money count toward your 2023 limits.
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Why this matters so much
First and foremost, many employers use annual contribution amounts to determine how large your match will be. Match amounts vary by employer, but a typical match is 50% of the amount the employee contributes, up to 6% of that employee's salary. If you haven't hit your employer's match cap for 2023 yet, you might be able to reach it or at least get close with a December push. That match is money available to you that goes away forever if you don't contribute enough to your plan on time.
In addition to the match, each year has its own limits for 401(k) contributions. For 2023, the typical limit is $22,500 if you're under age 50 or $30,000 if you're 50 or up. If you don't hit your 2023 limit by Dec. 31, then any future money you contribute will count toward the limit of whatever year you do contribute it during.
Ultimately, though, the most important reason to get started now instead of waiting is because the longer you invest, the better your chances are of winding up with a decent sized nest egg. The table below shows how much you would end up with by investing $500 each month, depending on what rate of return you earn and how many years you keep up the investments.
|
Years of Investing |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
45 |
$5,241,250.86 |
$2,637,269.95 |
$1,377,996.31 |
$754,734.87 |
|
40 |
$3,162,039.79 |
$1,745,503.92 |
$995,745.37 |
$590,980.67 |
|
35 |
$1,898,319.03 |
$1,146,941.24 |
$712,355.15 |
$456,865.47 |
|
30 |
$1,130,243.96 |
$745,179.72 |
$502,257.52 |
$347,024.70 |
|
25 |
$663,416.70 |
$475,513.20 |
$346,496.98 |
$257,064.77 |
|
20 |
$379,684.42 |
$294,510.21 |
$231,020.45 |
$183,387.31 |
|
15 |
$207,235.17 |
$173,019.11 |
$145,409.36 |
$123,045.24 |
Data source: author.
Whether you earn returns near the market's long-term historical 10% average, or whether future returns end up being lower, there is a huge benefit that comes from investing early and often. The sooner you start the payroll deductions that kick off your contributions to your 401(k), the more time you can potentially contribute to it.
With enough time on your side and reasonable returns, even $500 a month -- less than $17 per day -- invested into your 401(k) can be enough to get you to millionaire status by retirement. That's a compelling reason to start investing in your 401(k) now and let the automatic contributions continue to work for you over time.
Get started now
Whether it's because you want to maximize your match, get closer to your contribution limit for 2023, or start down the path of making regular investments for the future, time is running out. To have your 401(k) contribution count for 2023, you must have it deducted from your paycheck by December 31.
Many plans have processing times between when you fill out the paperwork and when you actually get your contributions flowing. As a result, to maximize your chances to get your contribution to count for 2023, make today the day you get your plan in place. Once you look back, decades from now, at the nest egg you've built thanks to making that decision, you'll very likely be happy you did.
