Sometimes, saving for retirement could be overdone and hurt your current financial needs. One has to remember that while there are a lot of tax advantages to contributing to a 401k plan, contributing too much could cost you more in the long run. It is important to first collect all possible matching supplied by your employer first. The amount to contribute more than that should be determined if this is ‘investing’ money. That is, if its money you do not need to buy things, saving for a down payment on a home, or may need it for certain things before you retire.
Probably when everybody does beat the bush today we’re going to look at how much contribute to your 401k plan if you happen to have one from your employer the number one thing to remember when you’re contributing to a 401k plan is that retirement fund is for retirement once it gets locked in there you’re not going to have access to it unless you pay a penalty the
Whole premise with the 401k is that it’s not packed now and it’s going to be taxed later hopefully when you’re retired you have a lower income so that it will be taxed at a lower tax bracket that money that comes out of your paycheck that untaxed it’s eventually going to be taxed there is a slight advantage here because even if you’re going to see in the same tax
Bracket when you retire it’s good to have a 401k plan because the portion that is not taxed right now has time to grow and this is significant it can be like anywhere between fifteen to thirty five percent extra money on top of whatever you’re contributing and this will be allowed to grow it’s allow in the future you have an emergency and you need to raid your 401k
Plan it just means that you didn’t hold enough cash to weather all the emergencies therefore you contribute it to your 401k a little bit too much when you need to rate it which is not recommended and you take it out before fifty nine and a half you’re going to have to still pay income tax on it and on top of that you have to pay at another ten percent let’s say
You’re at a 25% tax bracket and you wanted to take out ten thousand dollars a twenty five percent is two thousand five hundred dollars gone and the ten percent penalty so that’s another thousand dollars gone and what you’re left with is six thousand five hundred dollars out of that ten thousand the way it’s supposed to work is let’s say you’re at a pretty high
Tax bracket at thirty three percent or whatnot and then when you retire you own a whole bunch of stuff all you need is living cost really so you can maybe withdraw i don’t know 30 $40,000 your tax bracket goes really low maybe you can do even 20% 15% or whatnot and at that point 15 20 percent it’s like close to half of the tax that you have to pay if you just did
Not contribute to the 401k here are the typical 401k matching that i have seen for example some companies might allow you to contribute a maximum of three percent of your salary so you can go all the way up to three and then for that they’re going to contribute six percent of your salary for you so this is free money here so depending on how much you earn for your
Salary this will be variable assuming you earn the median income of 50k this translates to about three thousand dollars or free money it might be a one-to-one ratio where you contribute three percent of your salary and your employer contributes three percent so this is a one-to-one matching and then if you earn a 50k salary that translates to about $1,500 of three
Money a year sometimes the matching may not be as good they want you to contribute more while they contribute a portion of what you contributed for example you contribute three percent and they’re going to put in half of what you put in so it’s going to be 1.5 percent and the total of that will be $750 a lot of times when they do to a two to one ratio they would
Still give you three percent they just want you to contribute six percent of your salary and they’re going to put three percent in that case over you $1,500 sometimes your employer might actually do a four to one ratio whatever you put in they put in 1/4 of that except the point here is that you can go all the way up to your irs limit which is about eighteen thousand
Dollars twenty eighteen thousand dollars is a lot depending on your salary but if you’re able to put that in there then you’re going to get a benefit of four thousand five hundred dollars you can imagine if you’re at a point where you cannot contribute eighteen thousand dollars you’re going to be leaving some money hanging and this type of contribution is sort of
Skew towards higher earners because only really high earners is able to take off eighteen thousand dollars now what should you really contribute to your 401k well you should at least take advantage of the matching no matter what no matter where you are in life if you’re just beginning as a student if you’re trying to save for a house whatever it is make sure you
Get the matching even if it’s two to one if it’s four to one it might be hard so put in as much as you can but if it’s this two to one just just do maximum as you can so i would do six percent and let them put in three percent the way to think about this is essentially free money when it’s one two twos ratio is essentially a two hundred percent one-to-one is 100%
Game and two to one is a 50% game all of those are really really good you put in $1 and all of a sudden you have a dollar 50 we put in $1 you have $2 you put in $1 you have $3 these are really good so no matter what take advantage of the matching the whole deal with this is to find out how much you should actually contribute it’s not age dependent it’s really finance
Dependent where you are in life and how much you should contribute at all points in time you should always always get the matching no matter what that is because with the matching you can essentially pay the penalty and still come out ahead some people might be tempted to just max out their 401k right when they start their job this is not exactly a good idea because
You need money to do other things in life you need money now a certain portion of it to do certain things if you’re trying to save up for a home imagine contributing maximum all the time it’s going to take you much longer before you can save up enough for the down payment however if you’re at a point where you already have a place to live you don’t really need to
Save up for anything maybe you don’t need to save up for a car you built up your emergency fund you have enough to go by and then essentially you could either pay taxes on and now and take it outside of your retirement account and invest those or you can just not pay taxes now which is the preferred way if it’s money that you don’t need to use that you’re going
To invest anyways then it’s good to max out your 401k or as much as you can so that it’s not taxed now it may be tempting to max out your 401k because you can see your total tax bills go really low because you’ll essentially have $18,000 that’s not taxed anymore so i hope that was helpful in helping you set how many percent you should actually contribute to your
401k don’t forget to give me a like on this video comment down below let me know if you think you can ever contribute too much to a 401k if you’re interested in supporting this channel i have an audible link down below patreon over here and don’t forget to subscribe thanks for watching
Transcribed from video
How Much to Contribute to a 401k | BeatTheBush By BeatTheBush
