Image source: Microsoft Clip Art.
One of the best ways to boost your odds of reaching millionaire status by retirement is investing heavily in your 401k. News from the IRS indicates that for 2015, you'll be able to leverage your 401k a bit more than you could in 2014. The amount participants will be allowed to contribute is increasing due to inflation. For those under age 50, the limit increases from $17,500 to $18,000, and the additional catch-up for those aged 50 and up increases from $5,500 to $6,000.
The IRS reviews those contribution limits every year. Whenever cumulative inflation increases enough to warrant an increase from the prior level, the limit will rise in $500 increments. The limits did not increase for 2014, which makes the 2015 move that much sweeter for those aggressively saving for their retirements.
How this 401k news can help you become a millionaire
The money you invest in your 401k compounds tax-deferred, which means you can receive gains and dividends in your 401k without paying immediate taxes on them. If you contribute to a traditional 401k, you also get an up-front tax deduction by reducing your taxable income by the amount of your contribution. On the flip side, if you contribute to a Roth 401k, you pay taxes on your contribution amount, but you can potentially take the money out of your account completely tax-free in retirement.
Either way, letting your money compound tax-deferred goes a long way toward helping you reach that millionaire mark. In 2015, you can put away as much as $18,000 to $24,000 in savings -- on top of what you've already got working on your behalf -- in order to get closer to that level.
If you're just starting out in your career in your early 20s, a single year's $18,000 contribution, compounding at a 10% average rate for the next 43 years, could be enough to put you over that $1 million limit. If you're 50 or so and able to max out your contributions with the catch-up, you'll get there in 17 years if you consistently invest $24,000 and earn that same 10% return.
If you're somewhere in between your early 20s and your early 50s, a single year's contribution likely won't be enough to make you a millionaire. On the flip side, of course, you probably won't need to max out your plan for nearly two decades to have a shot at retiring as a millionaire.
Of course, that potential 10% return rate, while about in line with the long-run market average, isn't guaranteed. It does illustrate what might happen if things go your way. Still, the reality is that your best shot at becoming a 401k millionaire comes through consistent investing regularly over time. Take advantage of your 401k as early as you can and as persistently as you can throughout your career, and you'll increase your odds of retiring in comfort and financial security.
Make 2015 the year you start contributing to your 401k
News of changes to contribution limits typically comes at most once a year, but if you have a 401k available to you at work, you might be able to start contributing to it as soon as your next paycheck. Whether or not you can hit the $18,000 (or $24,000 if you're age 50 or better) limit for 2015, your 401k is a tool you should certainly consider contributing to if you'd like to find financial freedom in your future.
