NEW YORK, January 21, 2022 (Newswire.com) - The IRS has announced that the maximum annual contribution limit for 401(k) plans will be $20,500 for 2022. With an average rate of return between 5% and 8%, that can add up to a significant sum if you still have 20 years left before retirement. On the lower end, it would give you an income of over $9,000 a month in your golden years.
Return isn't the only good reason to boost your 401(k) contributions. You may want to build your account up for a 401(k) loan for credit card debt or maximize an employer match program. In this article, we'll review the benefits of each of these and give you a list of other benefits you can enjoy from boosting your 401(k) contributions in 2022.
1. Building Security for Your Golden Years
No one wants to struggle in their golden years. Far too many Americans work hard their entire lives and neglect their retirement savings. Don't make that mistake. Increase your contributions now so you can have peace of mind about retirement when you get into your sixties. Get as close to the maximum contribution level as you can.
2. Using Your 401(k) for Savings and Loans
The money in your 401(k) account is yours. You don't need to pass a credit check or have a high FICO score to borrow it. Rather than taking on a personal loan, consolidate your high-interest credit card debt with a 401(k) loan. It will leave you debt free and the only entity you'll owe money to is you. There's no interest rate when you're paying yourself back.
3. Maximizing Employer Match Programs
Some employers match up to a certain amount of your 401(k) contribution. The match is usually calculated as a percentage. An example of this would be a 100% cash match up to 2% of your annual salary. It's recommended that you increase your own contributions to ensure you're getting the maximum amount your employer is willing to contribute.
4. Deferring Your Income to Pay Less in Taxes
Contributions into a 401(k)-retirement account are tax deferred, meaning you don't pay taxes on that money right now. The taxes come out when you withdraw the money after you retire. Chances are you'll be in a lower tax bracket at that point, so you'll end up paying Uncle Sam less. You'll also get a return on that money, increasing its value.
5. Hitting Your Retirement Goals Early
Putting more money into your retirement fund now might give you the option of retiring early. This is a personal choice, of course. Some people prefer to keep working even after they have hit their retirement goals. Others want to focus on traveling the globe, playing as much golf as possible, or spending time with family.
Caution: Rate of Return is Not Guaranteed
There are a few reasons why contributing more to your 401(k) might not be the right move. Rate of return is one of them. The average rate of return for a 401(k) plan is 5% to 8%, and that is not guaranteed. Other investments might produce more. It is okay to diversify. Utilize your 401(k), but also seek out other, higher-return investments.