3 ways to Pump Up Your 401k

Friday, February 8th, 2019

By: Peter Vander Ploeg, CFP®

The Motley fool recently ran an article entitled, “If you don’t know these 3 things about your 401(k) , You’re losing out.”  The article was a great reminder to start 2019, but it could have gone a bit deeper.  Here are 3 additional ways to maximize saving in your 401(k) that you may not know about.

  1. Your Maximum Annual Contribution 

Strategy: Fund a Roth IRA through the backdoor 

While it’s true that the 401(k) contribution limits for workers under 50 went $19,000 and workers over 50 to $25,000, you don’t need to stop saving there.  The annual plan contribution limit has also increased to $56,000.  If your employer allows after tax contributions to your 401(k), you can save up to that amount inside your plan using after-tax dollars.  Why would you do that?  This strategy is a backdoor method to fund a Roth IRA.  The IRS allows the rollover of after-tax money inside of a 401(k) to a Roth IRA, without the income limitations that go along with making a regular contribution.  To calculate the amount of after-tax savings you can add to your plan use the following formula: Potential After-tax Savings = $56,000 – Your contribution amount – Your employer’s contribution amount 

2. Your Employer Match 

Strategy: Change your savings election to Roth 

Due to the Tax Cuts and Jobs Act of 2017 it is also a good idea to re-examine how you are saving in your 401(k) plan.  By switching your 401(k) savings elections to Roth, you will begin saving dollars that are tax free in the future.  Meaning you could end up paying less in taxes later in life and stretching the value of a dollar.  Most Americans will be paying less in taxes over the next 6 years, making it a great time to increase your contribution percentage too.

3. Your Plan’s Fees 

Strategy: Know what you are paying 

Knowledge is power.  One difficulty of investing in 401(k) accounts can be access to information.  Expense ratios on funds are important, but they aren’t everything.  Read through the 401(k) plan summary to understand if there are annual maintenance fees, distribution fees, and costs to rebalance your investments.  Then compare your plan’s costs to other options like an IRA.  You may find significant savings over time depending on your specific needs.    Just implementing one of these strategies can help you over the long term, but the combination of all three can be very powerful.  If you have questions regarding these or other strategies, please feel free to give us a call.