When to Increase 401(k) Contributions: 3 Key Things to Consider

A young women researching how to increase 401(k) contributions incrementally

Key Takeaways

  • Taking full advantage of a company match and potential tax benefits can maximize retirement savings growth.
  • Consider age, financial situation, and lifestyle changes when deciding on contribution increases.
  • Incremental increases, even 1% annually, can make a significant difference in long-term retirement savings.

There's no magic formula for contributions to a 401(k), which can make things confusing at times. How much you contribute initially, as well as when you increase 401(k) contributions (and by how much), will vary based on your unique financial situation and retirement goals.

Here's what to know as you try to develop an effective plan for building your retirement savings.

Increasing Your Retirement Contributions Offers Potential Benefits

Deciding to increase your 401(k) contributions is important for several reasons. For instance, if your employer offers a company match, but you're currently contributing below this amount, then you're essentially leaving free money on the table. People often invest because they want to take advantage of compound interest and potential growth in the stock market, which can help retirement savings increase over time. Not taking full advantage of a company match can prevent you from maximizing this potential growth.

Making 401(k) contributions also comes with some potential tax benefits. Depending on the type of 401(k) plan you choose, you can deduct your contributions, which could lower your taxable income and your tax bill.

401(K) Contribution Limits

For 2024, individuals under age 50 can contribute a maximum of $23,000 to a 401(k) and those age 50 and over can contribute up to $30,500, so the potential tax savings could be significant.1

You could then use these savings for next year's contributions or to achieve other financial goals, whether it's paying down debt or buying a new home.

3 Factors to Consider Before You Increase Your 401(k) Contributions

It's a good idea to factor in several things as you weigh whether to increase your contributions to a 401(k) — and by how much. These include your age, financial situation, preferred lifestyle and career plans.

1. Age

Your age is one of the most important factors to take into consideration when planning for retirement. Once you have an idea of the amount of money you'll need, you can use your current age and target retirement age to work backward and determine how much you need to save each month (and each year) to reach your retirement savings goal. If you're just five or 10 years away from retirement and aren't close to meeting your goal, you may need to increase the amount you regularly put toward retirement.

2. Finances

Your current financial situation will affect how much you can contribute. If you're carrying a lot of debt or have trouble meeting your monthly obligations, then you may not be able to contribute as much as you'd like.

If this is the case, you can shift your attention to focus on paying down debt — particularly high-interest debt — as this can help provide more financial breathing room. After improving your personal financial situation, you may be able to focus on increasing your contributions.

If your finances are already in good shape and you have enough money left over every month, you can consider contributing some of the excess funds to your 401(k). Some people have a tendency to over save. However, money sitting in a savings account might not grow as much as it would if you invested it. Remember that investments cannot guarantee growth or sustainment of principal value, and they may lose value over time. Past performance is not an indication of future results.

If you think your money could grow more in the market than your savings account, it may be wise to increase 401(k) contributions.

3. Career & Lifestyle

Significant life changes may provide an opportunity to boost your retirement contributions. For example, if you earn a promotion or raise, leave your job, move to a lower cost area, or pay off student and credit card debt, these situations can give you the chance to save more. This can be especially true if you're able to avoid lifestyle inflation or the temptation to spend more just because your income has increased.

It's important to keep in mind that increasing your 401(k) contributions doesn't require massive amounts of money. You could do this incrementally by increasing your contributions just 1% every year, which might not be that noticeable or significantly strain your budget.

Contribution Increases Can Help Fund a Financially Secure Retirement

When it comes to saving for retirement, it's crucial to use time to your advantage. Even a 1% annual increase in your retirement savings could mean thousands of dollars decades later, thanks to compound interest and time in the market.

By increasing your 401(k) contributions now, you can give your money more time for potential growth and help put yourself on a path to a more secure financial future. To get a better idea of your unique retirement planning needs, consider working with an experienced financial professional who can help you establish a goal and work toward it.

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  1. Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits.

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