Maximize Your 401(k): A Comprehensive Guide to Post-Setup Strategies

You may have just set up a 401k and wonder what to do next. Or you may have set up a 401k 10 years ago and may not know what you should do now.

In this article we’ll explore more about how to tackle your 401k.

What is a 401k?

A 401k is an employer-sponsored retirement plan. As an employee, you can choose to contribute a portion of your wages to fund a 401k account and your employer may match a portion of your contributions.

>>Read More: What is a 401k?

You can choose to invest the funds saved in your 401k in your employer’s plan offerings and take distributions from the account to support you when you retire.

How Does a 401k Work?

As an employee, you can decide how much to contribute to your account — subject to limitations, of course.

• In 2021, employees can contribute up to $19,500 to their 401k plan for 2020 and 2021.
• Employees 50 or over can add an additional catch-up contribution of $6,500 in 2021.
• Employer and employee contribution limits total $58,000 ($64,500 with the catch-up provision).

You can choose from two kinds of 401k accounts: You fund traditional 401ks through pretax income and Roth 401ks through post-tax income.

>>Read More: Roth 401k vs. Roth IRA – The Key Differences

Contributions get taken out of your paycheck before income taxes get calculated. These go into mutual funds and other investments and grow in value over time. You pay ordinary income tax on the withdrawals on a traditional 401k in retirement.

Best Strategies to Manage Your 401k

Consider the following tips to manage your 401k.

• Make sure you get the employer match. Many employers match $0.50 for each dollar you save up to a certain amount. Make sure you save enough to take advantage of it. If you don’t save enough to get the match, you leave free money on the table. You can link your current and old 401k accounts to Personal Capital’s Dashboard to see them as part of your overall, holistic net worth.

>>Read More: How Does 401k Matching Work?

• You can defer income tax payment when you save for retirement. Money goes into your retirement account before taxes in traditional 401k plans.
• You can tap into the saver’s tax credit if you earn a low income (less than $33,000 for individuals, $49,500 for heads of household and $66,000 for couples).

>>Read More: Retirement Savings: The Saver’s Credit Explained

• Consider a Roth 401k, a tax-free growth option. If you expect to be in a higher tax bracket later on, a Roth 401k might offer a great option. You pay no income taxes on qualified distributions.
• Check your fees. Some 401k investments have very high costs. Find the lowest-cost option that matches your risk tolerance. Personal Capital’s free and secure financial Dashboard provides you with tools to analyze your investments and uncover hidden fees.