4 Ways to Increase Your 401(k) Contributions in 2015
The IRS raised the 401(k) maximum contribution limit from $17,500 to $18,000 starting in 2015. Employees who are age 50 and older can contribute $6,000 extra to their 401(k) as catch up contributions. That's also an increase of $500 from the current catch up contribution amount of $5,500.
The higher maximum contribution amount is great news for employees who maximize their 401(k) contributions already. However, just 12 percent of 401(k) participants hit the maximum contribution limit in 2013, according to a Vanguard report. It is difficult to save for retirement because it is so far off. But the more you save now, the more comfortable your retirement will be. You definitely don't want to live on Social Security benefits alone. That's not enough for a comfortable retirement. You need to contribute enough to at least get your employer match. You're losing out if you're not getting that money from your employer. Here are four tips to help you increase your 401(k) contribution.
Split your raise. The economy is doing better, and hopefully it will continue in 2015. Companies are giving their workers much needed raises again, and it's a good idea to examine your 401(k) contribution before your raise kicks in. One easy way to increase your contribution is to split your raise with your retirement fund. This will be painless because you won't see a decrease in your take home pay. Of course, if you're ambitious, you can put the whole raise into your 401(k). This will give your retirement fund a big boost, and eventually you'll be able to max out your 401(k) contribution. A good time to set this up is right after you have your annual review and before the raise takes effect.
Track your expenses. Do you know what you spend money on every month? If you don't track your spending, it's hard to tell where all the money went. Consumers spend money on eating out, shows, clothes, cable TV and many other entertainment options. We all need to have fun sometimes, but such spending can get out of hand quickly. Track your expenses and you'll be able to separate what you spend into "necessary", "nice to have" and "forgettable" categories. There are probably things you spend money on that don't improve your quality of life. See if you can cut out cable TV or reduce the frequency of eating out. Whatever you reduce can go toward increasing your 401(k) contribution. Tracking your expenses is a necessary step toward financial security.
Automatic increase. Many companies now offer automatic contribution increases. Every year the automatic increase will raise your contribution by a certain percentage, often 1 percent. This is a great way to increase your contribution every year without having to do much. You'll need to contact your retirement plan administrator to see if your plan offers the automatic increase feature. Some of these plans require you to sign up for the automatic increase option.
Do your own taxes. If you closely examine your tax bill you will see that contributing to your 401(k) is a great way to reduce your tax liability. You'll save $5,040 in federal income tax if you are in the 28 percent tax bracket and contribute $18,000 next year. That's a significant amount of money. That tax bill is deferred and you won't have to pay it until you withdraw the money. If you drop into a lower tax bracket in retirement you will eventually pay less tax on the distribution. Reducing your current tax bill is a great incentive to save more.
Save more now. If you are already contributing the maximum amount allowed to your 401(k), don't forget to increase your contribution by $500 in January. If you're like the majority of American households who haven't reached the maximum amount yet, then give these four tips a try so you can increase your retirement saving. Saving more in your 401(k) will pay off later when you're retired. You can always roll the 401(k) over to an IRA or move it to a new employer plan if you leave your current job.
Joe Udo is a stay at home dad who blogs at Retire by 40 .
