Why You Should Max Out Your Retirement Accounts
Maxing out your retirement contributions is a good way to ensure you are building wealth for the future. Plus, it allows you to get the best bang for your buck.
Contributions to traditional 401(k), 403(b), IRA accounts are tax-deductible because you don’t pay taxes until you make withdrawals.
The more you put in, the more you might end up with in dividends and appreciation.
How much you contribute to your retirement account now can make a big difference over time.
The biggest asset anybody has in investing is time. The earlier you invest, the more possibility there is for your investments to appreciate. This is especially true for retirement savings because, when you use tax-advantaged retirement accounts, such as IRAs or 401(k)s, all that time in the market benefits from tax-free growth.
By the time you reach your 60s, your plan for reaching retirement generally benefits less from time in market, which means to reach your goal, you will need higher savings. No matter your age, taking full advantage of each yearly limit on tax-advantaged retirement accounts can be hugely important.
Let’s explore the major reasons to work toward maxing out retirement accounts.
1. Compound interest alone is reason to save early.
The more you deposit into a retirement account, like an IRA, the more you can end up with in interest and dividends over time. Compounding can practically work miracles. The greater the investment, the more interest and dividends you can earn, which in turn leads to greater rates interest and dividends. Betterment automatically reinvests dividends, making compounding very easy to manage. As you max out your retirement account, your money will harder for you due to compound interest alone.
2. Every year you miss is a lost opportunity in tax advantages.
Annual contributions to a 401(k), 403(b), and traditional IRA are tax-deductible because the accounts are tax-deferred. You pay taxes when you take disbursements in retirement, which means you pay less in taxes today and a larger portion of your income gets to grow during that time. But these contributions are limited year to year, so you only have each calendar year to make a contribution.
Roth accounts’ contributions are not tax-deductible—you contribute on an after-tax basis—but they grow tax-free. So maxing out your account might mean that you end up with more tax-free money in the long run, compared to traditional accounts. It’s worth noting that Roth IRAs are only available to people below a certain income level, so it’s key to know the rules before making a contribution.
Run the numbers to see if you would benefit more from a traditional account and an immediate tax benefit, or if you would do better to take the long-term benefits offered by a Roth account.
3. Know about retirement account contribution limits
The maximum you can contribute to a 401(k), 403(b) is $18,500 in 2018. The catch-up contribution limit for people age 50 or older remains at $6,000.
You can also contribute to your IRA. For both traditional and Roth IRAs, the maximum you can contribute is now $5,500 (the catch-up contribution is still $1,000 for people age 50 or older, bringing their total to $6,500). Contribution limits include other stipulations worth reading.
4. Building to the Maximum
Most of us can’t just start contributing the maximum immediately or in one lump sum. However, it’s possible to build up to maxing out your retirement contributions for the year. You can grow your contributions by increments. If your employer offers a match, do what you can to get the maximum match. This is free money that can be used to build your retirement nest egg.
From there, figure out how much you need each month to max out your contributions, and make that number your goal. Setting up automatic deposit can help make the monthly contribution an easier process.
Maxing out your retirement contributions is a good way to ensure you are building wealth for the future. Plus, it allows you to get the best bang for your buck due to tax advantages.
Try our retirement savings calculator. You can see what you are on track for with your current savings and adjust advanced settings like your retirement ZIP code and the age when you elect to receive Social Security.
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