You might think that participating in a workplace 401(k) is a no-brainer. But for some people, that's just not doable.
If money is tight, you might struggle to carve out room for retirement savings. The same could hold true even if you spend very frugally but don't earn a very high wage.
The good news, though, is that in 2023, 37% of workers increased their 401(k) contribution rate, according to recent data from Fidelity. That's in spite of a period of lingering inflation. And here are a few reasons you might want to follow their lead in 2024.
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1. You can shield more income from taxes
Most of us would probably prefer to pay the IRS as little money as possible. The more money you put into a traditional 401(k) plan, up to the annual contribution limit, the more income you can shield from taxes.
This year, 401(k)s max out at $23,000 for savers under 50. If you're 50 or older, you also get a $7,500 catch-up opportunity that brings your total allowable contribution to $30,500.
You might not be able to max out your 401(k) contribution this year since, well, that's a lot of money to be socking away for the future. But if you saved $5,000 in your 401(k) last year, aim for $6,000 or $7,000 this year. Not paying taxes on an extra $1,000 to $2,000 of income is a pretty good deal.
2. You might be able to get more free money from your employer
Many companies offer 401(k) plan participants some type of matching incentive. If you didn't manage to snag your full employer match in 2023, ramping up your 401(k) contribution rate this year could mean collecting every matching dollar you're entitled to.
That's huge, because there are really few opportunities in life where you're presented with free money. So it's a shame to pass up free money for your 401(k). Plus, the money your employer puts into your 401(k) is money you then get to invest and grow.
3. You'll have more opportunities to invest for your future
If retirement is pretty far off, you might not be so motivated to increase your 401(k) contribution rate this year. You might instead prefer to use that money to do something like take a vacation or upgrade your car.
But remember: The sooner you put money into a 401(k) -- or any other retirement plan, for that matter -- the sooner you can start investing it. And when it comes to growing wealth, time is one of your most valuable weapons.
Let's say you're 25 years old and you decide to put $1,000 more into your 401(k) this year than you did last year. Let's also assume you won't retire until 65 and that your 401(k) is invested in a manner that delivers an 8% return, which is a bit below the stock market's average. In that case, an extra $1,000 this year could be worth almost $22,000 in 40 years' time.
Allocating more money to your 401(k) isn't easy. But if you're able to do so this year, you could benefit in more ways than one.
