Maximizing Your 401(k) and IRA Contributions
Tax-advantaged retirement accounts like 401(k)s and IRAs are among the most powerful tools for building wealth. They offer tax benefits that can significantly accelerate your retirement savings compared to investing in taxable accounts. This guide covers contribution limits, employer matches, tax strategies, and practical steps to maximize your retirement account contributions.
Understanding Contribution Limits
401(k) Limits (2024):
- Employee contribution limit: $23,000 ($30,500 if age 50+ with catch-up)
- Total contribution limit (employee + employer): $69,000 ($76,500 if 50+)
IRA Limits (2024):
- Traditional and Roth IRA: $7,000 ($8,000 if age 50+)
- Income limits apply for Roth IRA contributions and traditional IRA deductibility
These limits typically increase annually with inflation, so stay updated each year.
The Power of Employer Matching
Many employers offer matching contributions to your 401(k)—essentially free money. Common matches include:
- 50% match up to 6% of salary
- 100% match up to 3-5% of salary
- Dollar-for-dollar match up to a certain percentage
Always contribute enough to get the full match. If your employer matches 50% up to 6%, and you make $60,000, contribute at least $3,600 (6%) to receive $1,800 in free money annually.
Missing your employer match is like leaving money on the table. Use our Retirement Calculator to see how employer matches accelerate your savings over time.
Traditional vs. Roth: Tax Strategy
Traditional 401(k)/IRA:
- Contributions reduce your taxable income now
- Withdrawals taxed as ordinary income in retirement
- Best if you expect to be in a lower tax bracket in retirement
Roth 401(k)/IRA:
- Contributions made with after-tax dollars
- Qualified withdrawals are tax-free in retirement
- Best if you expect to be in a higher tax bracket in retirement or want tax-free growth
Many savers use a combination: traditional accounts for immediate tax savings and Roth accounts for tax-free withdrawals later.
Prioritizing Your Contributions
Priority order:
- 401(k) up to employer match: Get the free money first
- Max out Roth IRA (if eligible): Tax-free growth and flexibility
- Increase 401(k) contributions: Up to the annual limit
- Consider HSA or other tax-advantaged accounts: If available
- Taxable investment accounts: After maximizing tax-advantaged options
This order maximizes tax benefits and employer matches while building flexibility.
Strategies to Increase Contributions
Automate increases: Set up automatic contribution increases annually (e.g., increase by 1% each year or when you get a raise).
Use raises strategically: When you get a raise, allocate a portion to retirement savings before you get used to the higher income.
Windfall strategy: Direct bonuses, tax refunds, or other windfalls to retirement accounts.
Cut expenses: Review your budget and redirect savings to retirement accounts. Small monthly reductions can add up significantly over time.
Reduce debt efficiently: Pay down high-interest debt first, but don't delay retirement savings unnecessarily. Balancing both is key.
Catch-Up Contributions
If you're 50 or older, you can make additional "catch-up" contributions:
- 401(k): Additional $7,500 (total $30,500 in 2024)
- IRA: Additional $1,000 (total $8,000 in 2024)
These catch-up provisions help you accelerate savings as retirement approaches.
Maximizing Both 401(k) and IRA
You can contribute to both a 401(k) and an IRA in the same year:
- Contribute up to $23,000 to your 401(k) ($30,500 if 50+)
- Plus up to $7,000 to an IRA ($8,000 if 50+)
- Total: $30,000 annually ($38,500 if 50+)
This dual strategy maximizes tax-advantaged savings and diversification.
When You Can't Max Out
If maxing out isn't possible right now, focus on:
- Getting the full employer match
- Contributing consistently, even if small amounts
- Increasing contributions gradually over time
- Using our Retirement Calculator to see how small increases impact your retirement goal
Even starting small builds the habit and benefits from compound growth.
Tax Considerations
Traditional accounts: Contributions reduce your current-year taxable income. A $10,000 contribution might save you $2,200-$3,700 in taxes (depending on your bracket).
Roth accounts: No immediate tax benefit, but withdrawals are tax-free in retirement. Consider Roth if you're in a lower tax bracket now or expect higher rates later.
Required Minimum Distributions (RMDs): Traditional accounts require withdrawals starting at age 73 (as of 2024). Roth IRAs have no RMDs, providing more flexibility.
Employer Plan Options
401(k): Most common employer plan, with higher contribution limits than IRAs.
403(b): Similar to 401(k) for employees of nonprofits, schools, and certain organizations.
457(b): For government and certain nonprofit employees, with separate contribution limits.
SIMPLE IRA: For small businesses, with lower contribution limits ($16,000 in 2024, $19,500 if 50+).
SEP IRA: For self-employed individuals and small business owners.
Common Mistakes to Avoid
Not getting the full match: This is free money—don't leave it on the table.
Contributing too conservatively: While safety is important, overly conservative investments may not keep pace with inflation over decades.
Ignoring fees: High expense ratios can eat into returns. Compare options and minimize fees when possible.
Taking early withdrawals: Withdrawals before age 59½ typically incur a 10% penalty plus taxes, significantly reducing your savings.
Not reviewing regularly: Check your accounts annually to ensure your asset allocation matches your goals and timeline.
Practical Steps to Maximize This Year
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Check your current contribution rate: Log into your 401(k) and see what percentage you're contributing.
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Calculate the match: Ensure you're contributing enough to get the full employer match.
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Set a target: Aim to increase your contribution rate by 1-2% if possible.
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Automate IRA contributions: Set up automatic monthly transfers to your IRA if you have one.
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Use tax refunds: Direct any tax refunds to retirement accounts.
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Monitor progress: Use our Retirement Calculator to track how increased contributions affect your retirement goal.
Frequently Asked Questions
Can I contribute to both a 401(k) and an IRA?
Yes, you can contribute to both in the same year, up to their respective limits.
What if I exceed the contribution limit?
The IRS charges penalties for excess contributions. Contact your plan administrator if you accidentally exceed limits.
Should I prioritize paying off debt or saving for retirement?
Generally, pay off high-interest debt first, but don't skip employer matches. Low-interest debt can often be managed while saving for retirement.
Can I contribute to a Roth IRA if I have a 401(k)?
Yes, as long as you meet income limits. Having a 401(k) doesn't affect Roth IRA eligibility, though it may affect traditional IRA deductibility.
What happens if I change jobs?
You can roll over your 401(k) to your new employer's plan or to an IRA. Avoid cashing out, which triggers taxes and penalties.
Keep Exploring
- Calculate your retirement progress with our Retirement Calculator
- Learn How Much You Need to Retire
- Understand The 4% Rule for withdrawals
- Explore Early Retirement Planning
Sources
- Internal Revenue Service (IRS) – Retirement plan contribution limits
- Employee Benefit Research Institute (EBRI) – 401(k) participation research
- Vanguard – Retirement account contribution strategies