Saving for retirement is one of the most important financial decisions you can make, and your 401(k) is a powerful tool to help you build a secure future. Maximizing contributions to this account can significantly impact your long-term financial stability. Here’s what you need to know about making the most of your 401(k).
Your employer-sponsored 401(k) provides tax advantages and long-term growth potential, but many people don’t take full advantage of it. Whether you're just getting started or looking to fine-tune your strategy, consider these key takeaways to ensure you’re on the right track.
Understand Contribution Limits
The IRS sets annual contribution limits for 401(k) plans. In 2025, employees can contribute up to $23,500, with an additional $7,500 in catch-up contributions for those 50 and older. Dollars contributed to this allow you to take advantage of tax-deferred or tax-free growth, depending on your tax treatment selected when making the contributions.
Maximize Employer Matching
Many employers offer matching contributions based on a percentage of your salary. Not taking full advantage of this is like leaving free money on the table. Ensure you contribute at least enough to receive the full employer match – it’s one of the simplest ways to boost your retirement savings.
Consider Tax Treatment: Three ways to contribute to a 401(k), provided they are offered by your employer's plan, include the following.
1.Pre-tax (Traditional) – Contributions are deducted and lower your taxable income today. The account grows tax deferred, but withdrawals are subject to ordinary income tax in the future.
2.Roth – Contributions are made with after-tax dollars. While no tax breaks exist up front, qualified withdrawals on your contributions and earnings will be tax free. These dollars are also not subject to future Required Minimum Distributions (a story for another article).
3.After-Tax – Not to be confused with Roth, these contributions are made with after-tax dollars but grow tax deferred, leading to growth dollars to be taxed at retirement. So why do this? You can contribute dollars beyond normal limits in these accounts, leading to accelerated savings. If you have a plan that offers in-service Roth conversions, you can use this strategy to do what we refer to as a “mega-backdoor” Roth conversion. This is the least used and least offered of the three tax treatment options.
Automate Contributions for Consistency
Setting up automatic contributions ensures you stay on track with your savings goals. Adjust your contribution rate periodically, especially after pay raises or bonuses, to make the most of your earning potential. It is better to get more funds put away before learning how to spend additional money.
Review Your Investments
The 401(k) is a vessel for tax treatment. The investments inside of the account are what make it go. Most 401(k) plans offer a variety of investment options, including index funds, target-date funds, and sector-specific investments. Consider your risk tolerance and retirement timeline when selecting your investment strategy, and make sure the funds are actually allocated.
Key Takeaways:
- Consider your tax situation today, and into the future, and pick the appropriate tax treatment of your contributions.
- Take full advantage of employer matching contributions.
- Automate contributions to maintain consistency.
- Diversify investments based upon your risk tolerance and time horizon.
By making strategic contributions, keeping an eye on your investment mix, and leveraging employer matches, you can make the most of your 401(k) and set yourself up for a comfortable retirement.
Financial Enhancement Group is an SEC Registered Investment Advisor.
