Adding a little clarity towards some common confusion around maxing out your 401k #401k #investing #financialadvisor #financialplanning…(read more)

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Maxing Out Your 401k – Difference Between the Match and the Limit

When it comes to planning for retirement, one of the most popular options for many employees is to contribute to a 401k plan. A 401k plan allows employees to save for retirement by contributing a portion of their salary on a pre-tax basis. Many employers also offer a matching contribution, which is essentially free money added to your retirement savings.

However, there are two important terms to understand when it comes to maximizing your 401k contributions: the match and the limit. Understanding the difference between the two is crucial for making the most of your retirement savings.

First, let’s define the terms. The match refers to the amount of money your employer contributes to your 401k based on the amount you contribute. For example, an employer might offer a 100% match, up to 3% of your salary. This means that if you contribute 3% of your salary to your 401k, your employer will also contribute an additional 3% of your salary.

On the other hand, the limit refers to the maximum amount you can contribute to your 401k in a given year. For 2021, the limit is $19,500 for individuals under the age of 50. For those over 50, there is an additional catch-up contribution limit of $6,500.

Now that we understand the terms, let’s discuss the importance of maximizing both the match and the limit.

Maximizing the match is essentially free money. By contributing at least the amount required to receive the full match from your employer, you are taking advantage of a valuable benefit. This is essentially an immediate return on your investment, and failing to take advantage of it is leaving money on the table.

Once you have maximized the match, it’s important to focus on maximizing the limit. Contributing the maximum amount to your 401k allows you to take advantage of the tax benefits and compound interest over time. By contributing the maximum amount, you are setting yourself up for a more comfortable retirement in the future.

In addition to the tax benefits and compound interest, contributing the maximum amount to your 401k can also help you reach your retirement goals more quickly. By consistently contributing the maximum amount, you are building a larger retirement nest egg, which can provide you with more financial security in your later years.

In conclusion, understanding the difference between the match and the limit is crucial for making the most of your 401k contributions. By maximizing both the match and the limit, you are taking full advantage of the benefits of a 401k plan and setting yourself up for a more secure retirement. So, review your retirement savings plan and make sure you are taking full advantage of both the match and the limit. Your future self will thank you.