Americans are contributing more to their retirement than ever before and don’t feel financially secure enough to stop working.
A 2024 study by Fidelity Investments found that “the average 401(k) savings hit a record 14.2%. However, only half of the Baby Boomer respondents who are still working feel they are “on the verge of retirement.”
Don’t waste time falling behind if you can improve your 401(k) now with these unexpected hacks.
“Future you” will be happy to learn these tax-saving tips and little-known employer benefits.
1. Contribute after tax
Some 401(k) plans allow after-tax contributions and allow you to roll them over to a Roth 401(k) or Roth IRA.
That means you bypassed the annual contribution limits and used legitimate means to get (a potentially unlimited amount of) money in a Roth account to grow tax-free for life.
It’s called the “mega backdoor Roth.”
If your employer allows after-tax contributions above the annual contribution limit ($22,500 in 2024, or $30,000 if you’re 50+), you can contribute up to the plan-wide limit ($66,000 in 2024, including employer contributions). These contributions can later be rolled into a Roth IRA, where they grow tax-free.
2. Avoid borrowing money
Many 401(k) plans allow loans. For some people, borrowing against their retirement savings is their only option for a financial emergency. It defeats the whole point of saving in a 401(k).
When you borrow from a 401(k), the funds you withdraw are no longer invested in the market. That means you’re missing out on potential compound growth, which is important for building wealth over time. Even a small loan can have a big impact on your account balance over decades.
Loan repayments are made in after-tax dollars. If you withdraw that money in retirement, you’ll pay taxes on it again.
Note: If you leave your job for any reason (voluntary or otherwise), your 401(k) loan is usually paid off in full within a short period of time, usually 60 days. The best way to avoid a loan is to save three to six months of income in emergency savings.
Pro tip: Get as much money as possible from your emergency savings. For example, SoFi Check offers 4% interest, and a sign-up bonus of about $300. (Subject to change without notice.)
3. Apply bonuses immediately
Early bonus contributions to your 401(k) take advantage of opportunities to grow your retirement savings without significantly impacting your day-to-day budget.
It’s a simple strategy to maximize your retirement savings and tax benefits. Because the bonus is not your regular income, it should not directly affect your lifestyle.
Bonuses can help you reach your employer matching threshold faster, increasing the “free money” your employer offers. It can also lower your annual taxable income, even putting you in a lower tax bracket.
Pro tip: If you have more than $150,000 in savings, consider talking to a professional financial advisor. Zoe Financial is a free service that matches you with professionals in your area.
Pro tip: Another modern way to diversify is through real estate and venture capital. Companies like Fundrise, offer investments as small as $10.
4. Make the most of your employer’s discretionary offer
Most employers distribute discretionary contributions at the beginning of the year (January) or before the tax filing deadline (April 15). Knowing this schedule ensures that you remain eligible for employment until the assignment date.
Employer discretionary contributions are a powerful but often overlooked 401(k) perk. Regardless of what you contribute, these contributions can significantly increase your retirement savings. Understanding your employer’s policies and benefits program is key to maximizing their value.
They count up to the IRS annual contribution limit ($66,000 in 2024) and grow tax-deferred, compounding over time. Match your contributions to the employer’s requirements to ensure eligibility and stay long enough to pay in full.
5. Taking out mortgage contributions after 50
Once you turn 50, use catch-up contributions to turbocharge your 401(k) savings. People age 50 and older can contribute an additional $7,500, raising the annual limit to $30,000.
While this is a great way to build your nest egg later in your career, it’s not a substitute for starting early and leveraging the power of compounding later. Mortgage contributions are an important tool for those who need to close previous savings gaps.
If you’re worried about funding your retirement, consider a part-time job to supplement your income.
Pro tip: Earn up to $1000 per month by doing simple tasks with FreeCash!
6. Fine-tune your portfolio
Once a year, prepare your 401(k) by reviewing your investment options.
Programs often include a combination of high-cost and low-cost funds such as mutual funds, index funds, and target date funds. Switching to those with lower expense ratios can significantly increase savings. Employers can also review financial offers, adding more efficient or less expensive options.
Use this opportunity to rebalance your portfolio, ensuring your asset allocation matches your risk tolerance and goals. Staying active helps you reduce fees, increase efficiency, and align your 401(k) with changing market trends or personal circumstances for better long-term results.
Pro tip: This may be a good time to consider investing in wine and whiskey. Vinovest can get you started with as little as $1,000.
7. Look for automatic expansion
Many programs allow you to set annual increases, which often coincide with salary increases, to ensure that your contributions grow without requiring constant effort.
By automatically increasing your 401(k) contribution, you eliminate the need to manually adjust your savings rate each year. Many people stick to their initial donation amount out of habit or forget to increase it over time.
Small increases, such as 1% per year, can add up to a lot over time while staying within your budget. A steady increase helps you reach higher savings goals, such as growing your 401(k), without feeling the financial strain of making a big one-time change.
8. Collect your dividend payments
Dividends earned in a 401(k) are tax-free each year, allowing you to reinvest the full amount to compound growth or redirect them to rebalance your portfolio without selling other assets.
Alternatively, you can let dividends accumulate as cash, creating liquidity to take advantage of market opportunities or fund withdrawals during retirement.
Annuities can provide you with a steady stream of income in retirement while preserving your principal investment. This tax-advantaged approach to dividend management helps you maximize growth during your working years and ensures flexibility and stability in retirement.
9. Give more than you expected
Higher contributions increase compound growth, allowing your money to grow more over time.
This strategy also protects against inflation, rising health care costs, and market volatility, ensuring you maintain financial security in retirement.
By saving more, you benefit from increased tax benefits – reducing taxable income for traditional 401(k)s or maximizing tax-free growth for Roth 401(k)s. Additionally, it encourages better financial behavior, helping you prioritize long-term goals while living less.
Starting with higher contributions ensures you won’t miss the annual limit, increasing the strength of your retirement plan. Saving hard now paves the way for a stress-free retirement.
10. Diversity beyond target day funds
Although target date funds are a popular default option in 401(k) plans, they are not the best option.
These funds automatically adjust your asset allocation based on your expected retirement age, but may not be a good match for your risk tolerance, investment goals, or your overall portfolio.
Diversifying beyond target date funds by choosing low-cost index funds or other investments in your plan’s portfolio can better tailor your 401(k) to your needs.
For example, combining a US stock index fund with international funds and bonds may provide wider diversification and higher returns. Review your plan options and rebalance periodically to ensure your investments are aligned with your goals and maximize your retirement savings potential.
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Cashing out your 401(k) is the first step to building a secure retirement.
Pair your savings with smart tax strategies, such as using Roth accounts or planning withdrawals to reduce tax liability. Consider diversifying with other retirement vehicles, such as IRAs or HSAs, to improve flexibility and growth potential.
Stay disciplined with regular reviews and adjustments to ensure your investments are aligned with your goals. A thoughtful, proactive approach today will prepare you for financial freedom tomorrow.
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