Contributing to your 401(k) account is one of the most effective ways you can save for your future and reach your long-term financial goals. But maximizing a 401(k) isn’t exactly straightforward. 

As a CPA, CERTIFIED FINANCIAL PLANNER™ professional, I get a ton of questions about contributing to a 401(k), making the most of your tax and matching benefits, and what to do with those funds when you change jobs. 

Here, I’ll answer the questions I get the most often. But if you have a question that isn’t covered below, feel free to schedule a meeting on my calendar.

Let’s jump in!

1. How can I make sure I’m on track to hit my retirement savings goals for this year?

The second half of the year is a great time to make sure you’re maxing out your 401(k) benefits. If you can, aim to contribute the full allowable amount for your age. 

In 2022, you can contribute up to $20,500 to your 401(k), or $27,000 if you’re over 50.

Towards the end of the year, it’s a smart idea to confirm that your employer is withdrawing the correct amount from your income, based on your age. Unfortunately, I’ve had clients who missed out on maxing their benefit because their employer didn’t make a withholding adjustment once they turned 50. 

When you catch these mistakes early in the year and adjust your savings accordingly, you have time to make the most of your benefits and True Up your 401(k).

2. If I haven’t contributed this year, is it too late to maximize my 401(k) benefits?

No, it’s not too late! You have until December 31st to contribute. 

Whether you realize you’re behind a bit on contributing, or your compensation changed, and you can now save more, when you make these adjustments at the halfway point of the year, you have ample time to maximize your 401(k).

3. What’s the best strategy for contributing? Monthly deposits, or in large chunks?

The best 401(k) savings strategy varies based on your cash flow, income, and needs. Some of my clients will set a specific automatic 401(k) savings percentage for the first few months of the year, until they’ve earned enough to stop paying Social Security tax for the year.

In 2022, earners are only required to pay Social Security taxes on the first $147,000 they earn.

Once they hit that income level and the Social Security tax is no longer deducted, they increase their 401(k) automatic withdrawal by the same amount. That way, their take-home pay stays the same, but they’re able to maximize their 401(k) benefit sooner in the year. 

When you work with a financial advisor (like the ones on our team here at Cook Wealth!) to adjust your contributions throughout the year, it’s much easier to manage your cash flow and maximize your retirement savings. 

4. I just got a new job. What do I do with my old 401(k)?

Lately, a ton of people have been switching jobs. And it’s easy to forget to take your 401(k) along with you! Instead of rolling each 401(k) out, people often forget about their funds and leave them scattered across different former employers. 

The best thing you can do when you leave a job is roll that 401(k) into one account with a plan, a goal, and intention. There aren’t any tax costs when you roll old 401(k)s into an IRA, so there’s no real reason to leave them separated and scattered. 

When you change jobs, remember, the $20,500 contribution limit applies to all employers and all jobs! Take care not to over contribute. If you were already on track to maximize this account, don’t overdo it at your new employer. 

5. My employer doesn’t offer 401(k) matching. Should I still save there?

Whether your employer matches or not, it’s still a good account to save in because of the pre-tax benefits. In this situation, the best place to save really comes down to your overall financial plan. 

A 401(k) is still one of the few ways to save pre-tax dollars. That’s especially beneficial if your income is high because it helps reduce your overall tax burden.

Saving into an unmatched 401(k) isn’t a bad thing to do, but it’s not too different from putting money into a traditional IRA. Your financial advisor can help guide you to the most beneficial plan for your situation and income level.

6. Is it better to save into a traditional 401(k) or a Roth 401(k)?

Again, I’ve got to give my favorite Tax Man answer… It depends! 

The best choice for you is based on your personal circumstances. Some people are in a lower tax bracket right now, but expect to be in a much higher bracket later in life (when they’d be withdrawing these funds). In that case, it makes sense to save into a Roth account now so they can pay the taxes now and enjoy tax-free growth later. 

Other people want the tax benefits now, so a traditional 401(k) makes more sense. They’ll have to pay taxes on their withdrawals and the growth, but it may lower their tax burden enough now to offset those future costs.

As with any financial plan, the best option for you is a balanced, tax-optimized approach. When you work with a dual financial and tax advisory team, you benefit from well-rounded expertise. Your financial advisor can help build a plan that aligns with your goals, while your CPA helps minimize your taxes— now and down the road.

7. I’ve contributed to my 401(k)…. Now what?

Contributing to your 401(k) is only half the battle. Now it’s time to invest that savings to drive the kind of return you can rely on in retirement. 

I find that most clients, especially those who are new to saving in a 401(k), are unfamiliar with the investment options that come with their plan. Typically, the company that your 401(k) is issued through (like Fidelity or Vanguard) has a list of funds you can choose from to invest your funds. That’s where your financial advisor will help you align your 401(k) with your goals and preferences. There are significant differences between these funds and how they operate, so this is an important choice with a long-term impact. 

At Cook Wealth, our retirement investment strategy is largely based on our clients’ age, time horizon, and risk tolerance. For younger clients who have decades left to save, we typically utilize a more aggressive investment approach with more risk, but also more return potential. 

For clients who are nearing retirement age, we keep things more conservative to protect their plan and continue growing their fund. 

Regardless of the exact investment strategy we use though, the contribution strategy nearly always remains the same: Save as much as you can in a 401(k), for tax benefits, employee matching, and a secure future. 

Once you’ve maximized your 401(k) by contributing the full $20,500 or $27,000, we’ll start looking at other financial goals and opportunities, like:

  • Paying down any debt
  • Building up your emergency fund
  • Long-term non-taxable investments like a Roth IRA
  • Securities investing

It’s easy to make savings mistakes. That’s where it really benefits you to work with a knowledgeable financial advisor who can understand your unique situation, prioritize your goals, and help you save and invest the smart way.