How to Max Out 401k

If you max out 401k contributions and invest wisely, you will grow a very valuable retirement account for your future.

When it comes to saving for retirement, the 401k plan is the most widely used employer retirement savings plan available. The majority of working Americans are able to participate in a 401k plan and many companies will provide a match on contributions made into the plan by the employee. The money that you contribute to a 401k will be available for you to use during retirement to help supplement your other retirement income sources. Some companies have restrictions on how the money that the company contributes can be invested and when it becomes available to you as an employee. This article will provide useful information to help you max out 401k contributions and in doing so, build a large retirement nest egg.

Instructions

1. 

   First, to max out 401k contributions, you will want to learn about your employer's 401k plan. You will want to know who the plan provider is, what investment options are available for your contributions, and who can help you get signed up as a participant in the plan. You will also want to know if your company will provide a match on your contributions, how much the match is, and when the match dollars are fully owned by you as an employee. For example, some companies require you to work for at least five years before the dollars they put into the 401k plan for you are considered "vested" (owned by the employee). After gathering all of this information so you are an informed investor, you will now want to sign up to participate in the plan.

2. 

   Now, to max out 401k contributions, you will need to set your contribution rate. Most companies will take the contributions directly out of your paycheck at your request. You may choose to contribute a set dollar amount, such as $200 per week, or you can contribute a percentage or your income, such as 20% of income. The contributions will come out of your paycheck "pre-tax", which means that the dollars going into the plan are not initially taxed as income. You will not have to pay income taxes on these dollars until you withdrawal money from the 401k plan during retirement. To truly max out 401k contributions, if you are under age fifty, you can contribute a max of $16500 in 2009. If you are over age fifty or older, you can contribute the normal $16500 plus another $5500 as a "catch up" contribution, for a total of $22000! If you are not intially able to max 401k contributions, then start with a reasonable amount and gradually work up towards the maximum allowable contribution. The maximums do not include contributions made by your employer.

3. 

   If you are just looking to start your 401k and gradually increase your contributions, you will at least want to take advantage of any free money provided by your company. For example, if your company will put in fifty cents for every dollar that you put in up to 10% of your salary, then you will want to contribute a minimum of 10%. This way, for each dollar that you contribute, one dollar and fifty cents will be put into your 401k plan. This is sometimes referred to as "meeting the company match", which just means you are taking advantage of all possible contributions provided by your employer.

4. 

   After setting up to max 401k contributions, you will now want to review your investment options. Most 401k plans have options ranging from very conservative guaranteed rate cash funds all the way to very aggressive stock funds. You will want to speak with the plan provider financial representatives or your personal investment consultant to decide which options are best to help you meet your investment objectives. If you do not want to ever lose any value in your 401k, then you will want to invest in the guaranteed return option.

5. 

   Finally, now that you have put in the effort to max 401k contributions, it is time to let your money go to work for you. You will be pleasantly surprised with how quickly your account value grows as you, and maybe even your company, add money to your 401k each paycheck. After you make your contributions, those contributions will earn interest, which will also grow the account. The more time you can allow your money to earn interest the better, as your interest will compound over time. With time and patience, your 401k will grow to become a very valuable part of your total financial picture.

Tips & Warnings

• Do not get talked into buying stock mutual funds inside of your 401k if you are not comfortable owning stocks.

• If you leave your current employer, you will be able to rollover your 401k to your new employer or to an IRA - Individual Retirment Account.

• Because your contributions are pre-tax, you will pay less income taxes in the years that you make 401k contributions. Again, the funds will be taxed when you take them out during retirement.