Contributor: Kristen Fricks-Roman
Company: Morgan Stanley Wealth Management
Title: Financial Advisor
When it comes to achieving your ultimate retirement goal to live comfortably after you’ve stopped working, developing a retirement savings plan is crucial. Taking advantage of a 401(k) plan as soon as possible has numerous long-term benefits.
Here are five ways to make sure you are maximizing your 401(k) and padding your retirement pocket as much as possible:
- Evaluate your contributions. If you are currently participating in a 401(k) plan through your company or organization, great! You have made a big step toward saving for your future. Take the time to evaluate how much you are contributing and if you can allocate more to it. Contributing the maximum amount your employer allows may feel like you are taking a big chunk out of your overall budget, but, the more you can manage to put away, the better. Though it might seem challenging, adjusting your budget now could mean reaping the benefits in the long term. However, it is always important to weigh your situation and juggle your financial priorities accordingly.
- Match it up. Many companies offer a matching provision for your contributions that equates to free money, so be sure to check your plan to see if you are taking advantage of that match. In addition, employer matching typically does not count toward your annual contribution limits. The maximum 401(k) contribution limit for 2018 has been increased to $18,500, up $500 from previous years. If you are over the age of 50, you can contribute an extra $6,000 as part of the “catch-up provision” that allows you to save more as you approach retirement age.
- Understand the tax implications. Contributing to your 401(k) can reduce your taxable income now, because contributions are made on a before-tax basis. Plus, any earnings growth happens on a tax-deferred basis, so you won’t owe taxes on the money until you withdraw it (hopefully at a lower tax rate when you’re older). Be aware that if you do withdraw money from your 401(k) before age 59½, you must pay both income tax at your current rate and a 10 percent penalty for early withdrawal. Consult a tax professional if you have questions about tax implications.
- Take advantage of time. The compounding effect of tax-deferred growth can be a powerful way to build a retirement fund for your future. Simply put, the younger you are when you start saving, the better off you will be long-term. However, remember that it is never too late to start, and catch-up provisions can help if you feel that you are behind where you would like to be.
- Go on autopilot. When you participate in a 401(k), your employer can set you up with convenient deductions directly from your paycheck. This way, you are automatically contributing before you receive the money and, therefore, easily saving and investing your money.
The road to retirement saving success is like any other road in life – you take it one step, and one contribution, at a time. The key is to get started and to keep going. If you feel like you need help along the way, a financial advisor or tax professional can help create the best road map for you.
Kristen Fricks-Roman CFP®, CRPS®, is a financial advisor and senior vice president at Morgan Stanley Wealth Management, Atlanta. She can be reached at [email protected].
The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Smith Barney LLC and its Financial Advisors do not provide tax or legal advice. Individuals should seek advice based on their particular circumstances from an independent tax advisor. Morgan Stanley Smith Barney, LLC, member SIPC.