It has been said that investing is one of the ways to benefit from max 401K contributions. For some people who are not afraid of taking risky investments, they usually see the money first before the risks. Even though investing in various money markets is one of the methods that most 401K contributors partake, there are still some people who simply stick within the plan.
There are several reasons why some folks are happier just sticking to their existing 401K plans. One of these reasons is that they can use the power of max 401K contribution by increasing it year after year. If you consider the amount of taxes that you can save each year, you’ll be able to save more for your retirement. And speaking of taxes, your 401K’s investment income (may include capital gains, dividends and interests), are not taxed since they are within the plan; hence your money grows in a much rapid pace.
There’s also this thing called ‘automatic 401K contribution increase’ which only means that as your income/salary increases, the percentage that goes to your 401K also increases. But if you wish to increase your max 401K contribution, you just have to tell your employer to increase the percentage that he’s deducting from your salary. This is also the same for self-employed individuals who have full control of their 401K accounts.
At this point, you might be questioning yourself if it is indeed a good decision to increase your max 401K contribution. The answer to that is ‘yes’ since you are not putting any risks onto your retirement savings. However, you will only enjoy the benefits of these major decisions once you get hold of your 401K when you retire.
The best thing to do is to stick with this strategy if you do not wish to invest outside of your 401K plan. Also, be mindful of the consequences when you are thinking of taking a loan against your 401K. You’ll lose a part of your savings if you fail to return the money on time because there are penalties, taxes and fees. And the only way to restore your account is to do it over again without ever loaning the money.