A 401(k) is often an individual’s greatest investment, in contrast to our emotional tendency, to get in when markets are exciting (high) and sell when markets are scary (low). Through payroll deductions, 401(k) contributions are on auto-pilot, allowing employees to keep the long-term mindset needed to stay invested during down markets. Plus, because investments are made with every paycheck, the equal contributions buy more shares when markets are down, which provides greater returns over time.
Unfortunately, many employees limit their salary-deferral contributions to only what is needed to capture their employer’s match. Because these contributions are tax-deferred, the bite of increasing your deferrals is softened. For example, if a married couple’s 2023 taxable income is between $89,000 and $190,000, your next dollar is federally taxed at 24%. So, an extra $1000 contributed to your 401(k) per paycheck only reduces your take-home by $760. And you probably have state taxes, which lessen the impact as well.
If you’re good about paying off your credit cards and have a couple months of emergency cash, we recommend investing your next dollar into your employer’s retirement plan, for all the reasons above.
For 2023, employees under 50 can defer as much as $22,500. Employees who attain age 50 before or during the year can add another $7,500.
Do you still have money in a former employer’s plan?
- Employers have greatly narrowed plan investment choices to avoid liability after the tech bubble of 2001.
- Many plans now restrict choices to “target date” funds and generic index funds.
- Both have issues that we discuss in other blogs in this series
Can’t wait for the next issue? Learn more about investing beyond the restricted choices in your retirement plan.