You can probably think of a millions things to do with your disposable income. Maybe you’ve been dying to take a vacation. Then again, perhaps you feel it’s time to update a few pieces in your wardrobe. What you decide to do with your money is your business. But before you blow your cash on things that don’t offer long-term benefits, consider four good reasons to max out your 401k contributions in 2013.
I know, beefing up your retirement account isn’t as exciting as taking a dream vacation or enjoying another perk. However, the retirement decisions you make today determines how well you’re able to live in the future.
1. You already have an emergency saving funds.
If you have extra cash, you may reason that it’s better to keep this cash liquid and build your emergency fund. This too can work. But if you already have a sizable amount in savings (say, three to six month’s worth of income), shifting your focus to your 401k makes good financial sense. Cash in your regular savings account – while available for immediate withdrawal – earns pennies in comparison to what you could earn by contributing funds to your retirement plan.
2. Your employer will match your contribution.
Start a retirement savings plan with your job and your employer may match your contributions – this is basically free money. This provision can grow your retirement account faster. Contribute the maximum allowed by your employer and pave the way for a healthy, comfortable retirement. However, the fact that your employer doesn’t offer a match program isn’t an excuse to shortchange yourself. Regardless of any match, the money in your account compounds year after year, which basically means you earn interest on your interest. The more you contribute, the better.
3. Lower your taxable income.
Are you looking for a way to reduce your tax bill? Maxing out your 401k contributions in 2013 might be the answer. You may not be aware of this, but contributions are deducted from your wages before your employer withholds taxes. Maybe this doesn’t seem like a huge deal, but the fact that contributions are made with pre-tax dollars reduces your taxable income, which basically results in paying fewer income taxes. Plus, you enjoy tax-deferred growth. Not that you’re completely off the hook tax-wise. With a 401k plan, you will pay ordinary income tax on funds withdrawn from the account.
4. Retirement is right around the corner.
Some people don’t get serious about retirement planning until later in life. If retirement is fastly approaching and you haven’t set aside enough cash to maintain a certain standard of living, this is a good reason to max out your contributions this year. Not only can you increase your contributions, you may be eligible to make catch-up contributions to your plan. The IRS limits how much you can contribute each year. In 2013, this limit is $17,500, but if you’re over the age of 50, you can play catch up and contribute an additional $5,500.