No matter where you are in your retirement journey, you should always be open to real ways to maximize your retirement accounts and grow your nest egg. When it comes to existing bills, debt payments, and other needs, retirement savings can easily fall pretty low on the priority list.
However, it pays to focus on retirement savings early so you can maximize compound interest. Even if you invest a little money or a fixed amount now and don’t touch it for years, it will still grow to a bigger amount in the future thanks to interest compounding over time. Check out these 4 ways to maximize your retirement account right now.
Boost 401(k) Contributions By 1%
If you’re already contributing to a 401(k), that’s great. This is one of the easiest ways to invest in your future retirement without even thinking about it. The money is deducted from your regular paycheck before you even see it, just like with taxes.
What some employees may not know is that they can increase their contributions at any time. Just let your employer or the company’s 401(k) manager know that you would like to put more into your retirement account and they can increase the percentage.
Boosting your contributions from 3% to 4% or 5% may not even make a noticeable difference when you get paid. Yet, it can make a major difference over the years when that extra cushion is added to your retirement fund. One of the best times to do this is when you get a raise. That way, you can treat that raise as extra income and invest it automatically instead.
Open an IRA
If you haven’t opened an IRA yet, it’s a good idea to get one. An IRA stands for Individual Retirement Account meaning you don’t need to open the account through your employer. There are two main types of IRAs being Traditional and Roth. A traditional IRA works similar to a 401(k) because it’s tax-deductible. However, you can contribute more to your 401(k) each year.
A ROTH IRA is funded with after-tax dollars meaning you won’t pay any taxes when you withdraw the money during retirement. Right now, you can contribute a maximum of $6,000 to your IRA each year. If you’re over the age of 50, you can make an additional (catch-up) contribution of $1,000.
Open your IRA with almost any brokerage and try to make monthly contributions by setting up automatic transfers. You don’t have to max out your IRA contributions right away – especially if you have other investment accounts. However, if you did, you’d be adding an extra $6,000 to your investments each year. That money will compound and you’ll have a bigger nest egg to retire with while being prepared for any unexpected expenses you might incur.
Use Catch-up Contributions
If you’re 50 or older, you are eligible to contribute extra money to your retirement accounts. This is commonly known as making catch up contributions. Those who qualify can currently put an extra $1,000 into an IRA account and $6,500 into a 401(k). Keep in mind that annual contribution and catch-up limits are subject to change each year.
Don’t fall for the myth that at 50 you’re too old to make retirement contributions. If you’re 50 and don’t plan to retire until 65, you still have 15 years to save. If you made the $6,000 catch-up contribution for 10 years in addition to maxing out your 401(k), you’d contribute $260,000 before calculating compound interest. The market has yielded a healthy average return of anywhere from 7% to 10% consistently over the past few years.
This may seem like a lot of money to contribute when you’re older, but keep in mind you may not have as many responsibilities as you did in your 30s and 40s like a mortgage, kids, etc.
Do Something Clever With Your Tax Savings
One of the most underrated advantages of saving for retirement is the tax benefits. Your 401(k) and Traditional IRA accounts are tax-deductible meaning whatever you contribute directly lowers your taxable income for the year. Instead of just pocketing your savings from the tax deduction, see if you can funnel some of that money into other investments like real estate or a brokerage account.
Another way to get clever with your tax savings is to open an HSA. An HSA is a Health Savings Account available through some employers for people with high-deductible health care plans. With an HSA, you can contribute money (tax-free) to the account to be used to fund qualifying future medical bills. However, once you save $3,000 in your HSA, you can start investing additional contributions.
So long as your HSA funds are used for qualifying medical bills or to reimburse you for medical expenses, the money you withdraw is tax-free and any earnings you receive as a result of interest grows tax-free as well.
There are so many ways to maximize your retirement, so this can definitely be looked at as a long-term journey. The whole purpose behind the retirement system is to let your money start to work for you over the years. Making the most of your retirement plan doesn’t have to be difficult or time-consuming. Start with one of these steps and put it on autopilot.