Americans contribute more to their retirement than ever and still don’t feel financially secure enough to stop working.
A 2024 Fidelity Investments study found that the “average 401(k) savings rate reached a record 14.2%.” However, only half of Baby Boomer respondents still working feel they’re “on track to retire.”
Don’t waste time falling behind when you can optimize your 401(k) now with these unexpected hacks.
“Future you” will be grateful for learning these tax-saving tactics and little-known employer perks.
1. Contribute after-tax
Some 401(k) plans allow after-tax contributions and permit you to transfer them into a Roth 401(k) or Roth IRA.
That means you’ve sidestepped annual contribution limits and used perfectly legal means to get (potentially unlimited amounts of) money into a Roth account to grow tax-free for life.
It’s called the “mega backdoor Roth.”
If your employer allows after-tax contributions beyond the annual contribution limit ($22,500 in 2024, or $30,000 if you’re 50+), you can contribute up to the overall plan limit ($66,000 in 2024, including employer contributions). These contributions can later be rolled into a Roth IRA, where they grow tax-free.
2. Avoid loans
Many 401(k) plans allow for loans. For some people, borrowing against their retirement savings is their only option for a financial emergency. It goes against the whole point of saving in a 401(k).
When you borrow from your 401(k), the funds you withdraw are no longer invested in the market. That means you miss out on the compounding growth that could have occurred, which is crucial for building wealth over time. Even a small loan can significantly impact your account balance over decades.
Loan repayments are made with after-tax dollars. When you withdraw that money in retirement, you’ll pay taxes on it again.
Beware: If you leave your job for any reason (voluntarily or otherwise), your 401(k) loan is often due in full within a short time frame, typically 60 days. The best way to avoid loans is to save three to six months of income in emergency savings.
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3. Contribute bonuses right away
Immediately contributing bonuses to your 401(k) capitalizes on opportunities to boost retirement savings without significantly impacting your day-to-day budget.
It’s a simple strategy to maximize your retirement savings and tax advantages. Because a bonus isn’t your regular income, it shouldn’t directly affect your lifestyle.
Bonuses can help you reach your employer match threshold faster, maximizing the “free money” your employer offers. It can also lower your annual taxable income, even dropping you into a lower tax bracket.
Pro Tip: If you have over $150,000 in savings, consider talking to a professional financial advisor. Zoe Financial is a free service that will match you with a pro in your area.
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4. Make the most of your employer’s discretionary contribution
Many employers distribute discretionary contributions early in the year (January) or before tax filing deadlines (April 15th). Knowing this schedule ensures you remain eligible by staying employed through the allocation date.
Employer discretionary contributions are a powerful but often overlooked 401(k) perk. Regardless of your input, these contributions can significantly boost your retirement savings. Understanding your employer’s policies and vesting schedule is key to maximizing their value.
They count toward the IRS annual contribution limit ($66,000 in 2024) and grow tax-deferred, compounding over time. Align your contributions with employer requirements to ensure eligibility and stay long enough to vest fully.
5. Max out catch-up contributions after 50
Once you turn 50, take advantage of catch-up contributions to turbocharge your 401(k) savings. Individuals 50 and older can contribute an additional $7,500, boosting the annual limit to $30,000.
While this is a great way to build your nest egg later in your career, it’s no substitute for starting early and leveraging the power of compounding over time. Catch-up contributions are a valuable tool for those who need to make up for earlier savings gaps.
If you are concerned about funding your retirement, consider some part-time work to supplement your income.
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6. Fine-tune your portfolio
Once a year, optimize your 401(k) by reviewing your investment options.
Plans often include a mix of high- and low-cost funds like mutual funds, index funds, and target-date funds. Switching to those with lower expense ratios can significantly boost savings. Employers may also update fund offerings, adding better-performing or lower-cost options.
Use this opportunity to rebalance your portfolio, ensuring your asset allocation matches your risk tolerance and goals. Staying proactive helps you reduce fees, maximize performance, and align your 401(k) with changing market trends or personal circumstances for better long-term results.
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7. Look into automatic increases
Many plans let you set annual increases, typically aligned with salary raises, ensuring your contributions grow without requiring ongoing effort.
By automating your 401(k) contribution increases, you manually eliminate the need to adjust your savings rate annually. Many people stick to their initial contribution rate out of habit or forget to increase it over time.
Small increases, like 1% per year, can compound significantly over time while staying manageable within your budget. The steady increase helps you reach higher savings goals, such as maxing out your 401(k), without feeling the immediate financial strain of making a large one-time adjustment.
8. Harvest your dividend payouts
Dividends earned in a 401(k) aren’t taxed annually, allowing you to reinvest the full amount for compounding growth or redirect them to rebalance your portfolio without selling other assets.
Alternatively, you can let dividends accumulate as cash, creating liquidity to take advantage of market opportunities or fund withdrawals during retirement.
Dividends can provide a steady income stream in retirement while preserving your principal investments. This tax-advantaged approach to managing dividends helps you maximize growth during your working years and ensures flexibility and stability in retirement.
9. Contribute more than you expect
Higher contributions maximize compounding growth, allowing your money to grow significantly over time.
This strategy also safeguards against inflation, rising healthcare costs, and market volatility, ensuring you maintain financial security in retirement.
By saving more, you benefit from increased tax advantages – reducing taxable income for traditional 401(k)s or amplifying tax-free growth for Roth 401(k)s. Additionally, it encourages better financial discipline, helping you prioritize long-term goals while living on less.
Starting with higher contributions ensures you won’t miss the annual limit, maximizing your retirement plan’s potential. Saving aggressively now paves the way for a stress-free retirement.
10. Diversify beyond target-date funds
While target-date funds are a popular default choice in 401(k) plans, they’re not always the best option.
These funds automatically adjust your asset allocation based on your expected retirement year, but they may not align perfectly with your risk tolerance, investment goals, or the rest of your portfolio.
Diversifying beyond target-date funds by selecting low-cost index funds or other investments in your plan’s lineup can better tailor your 401(k) to your needs.
For instance, combining a U.S. stock index fund with international and bond funds might offer broader diversification and higher potential returns. Review your plan’s options and rebalance periodically to ensure your investments align with your goals and maximize your retirement savings potential.
Plan for what comes next
Maxing out your 401(k) is the first step in building a secure retirement.
Pair your savings with smart tax strategies, like leveraging Roth accounts or planning withdrawals to minimize tax liability. Consider diversifying with other retirement vehicles, such as IRAs or HSAs, to enhance flexibility and growth potential.
Stay disciplined with regular reviews and adjustments to ensure your investments align with your goals. A thoughtful, proactive approach today will set you up for financial freedom tomorrow.
