5 Savvy Strategies for Maximizing Your 401(k) Contributions

Saving for retirement is one of the most important long-term goals for your personal finances. According to research from Fidelity, as of the third quarter of 2023, Americans contributed an average of 13.9% of their income to their 401(k) plans. (This percentage includes employer-matching contributions.) That’s a pretty healthy contribution rate — a general rule of thumb among financial experts is that people should try to save 15% of their income for retirement. But putting 13.9% of your income into a 401(k) might not be enough for everyone. If you’re behind on your retirement goals, or if you want a bigger tax break for your retirement savings, you might want to consider putting even more money into your 401(k). Let’s look at a few ways you can make the most of your 401(k) contributions in 2024.

1. Double check the 401(k) contribution limits

Do you know how much money you’re allowed to put into your 401(k)? If it’s been a few years since you started contributing to a retirement plan at work, you might not be aware of just how much money you can sock away on a pre-tax basis. According to the new IRS rules, you can put up to $23,000 into a 401(k) for 2024. (This contribution limit also applies to other employer-based retirement plans, like 403(b) and 475 plans, and the federal Thrift Savings Plan.) Are you 50 or older? If so, use 401(k) catch-up contributions — people age 50+ can put an extra $7,500 into a 401(k) for 2024, for a total of $30,500.

2. Make investing automatic with every paycheck

One of the best advantages of using a 401(k) is that it makes it easy to invest automatically with every paycheck. Look at your options with your employer’s retirement plan administrator to see how to adjust your 401(k) contributions — some will typically allow you to set a fixed percentage of each paycheck, or a fixed amount of each paycheck. You can also change your 401(k) settings throughout the year.

3. Get your employer match (if any)

If your employer offers a 401(k) match, earning it is a smart move that you should make. Get that free money! Just like you should take all your paid time off, claiming your full employer match is part of getting what you deserve from your job. Check to see if your employer-matching contributions are fully vested (meaning you “own” the contributions in your account) or if you have to stay employed with the organization for a minimum amount of time before the contributions vest. Even if you have to wait a few years for the full vesting of the employer match, it’s still likely worth contributing enough to your 401(k) to get it.

4. Got a pay raise? Make extra 401(k) contributions

If you get a promotion or pay raise at work, this is a chance to bump up your 401(k) contributions. Consider raising your contribution by 1% per year to keep growing as your income grows. If you want to get more precise, you could adjust your 401(k) contributions temporarily for a few months — such as setting it up to take out an extra 5% of your salary for three months. Automatically increasing your 401(k) contributions can help “train” you to live on slightly less of your income, instead of spending every new dollar you get. It can also help you keep getting tax breaks for your retirement savings as your income (and perhaps your tax bracket) increases.

5. Are you a high earner? Consider maxing out your 401(k)

There are no income limits for who is allowed to contribute to a 401(k). This isn’t true for every tax-advantaged retirement account — traditional IRAs have income limits for who is allowed to make tax-deductible contributions, and Roth IRAs have income limits on who is allowed to use them at all. So if you’re a high earner, your 401(k) might be your best chance to save money for retirement while getting a tax break. For example, if you’re age 50 and single, and your income is $120,000 for 2024, you’re not allowed to use a tax-deductible traditional IRA. But you could max out your 401(k) with $30,500 of your income, and that $30,500 will not be counted toward your taxable income on your tax return. But if you’re in a lower tax bracket, maxing out your 401(k) might not be the best move. People of lower income levels should definitely do what it takes to get their full 401(k) employer match, but beyond that amount, you might want to consider putting extra cash somewhere else. Use a traditional IRA or Roth IRA (or both) if you qualify. These accounts are more flexible than 401(k)s in case you need an early withdrawal. Or open a taxable brokerage account — these accounts make it easy to invest for multiple goals throughout life, not just retirement. There is such a thing as saving too much money in your 401(k), as you may need cash for other purposes or have a big life event that changes your plans.

Bottom line

401(k)s are a great retirement savings option for high-income employees who can’t use a traditional IRA or Roth IRA. But if you qualify for these other accounts, you might not want to max out your 401(k). Consider opening a brokerage account for extra flexibility.