Is Maxing Out Your 401(k) Contribution a Good Idea?

8/26/2021

If you work for a for-profit company, you can take advantage of a retirement savings vehicle called a 401(k). It is an employer-provided retirement account that you, and possibly your employer, contribute pre-tax dollars to, with rules and annual limits set by the federal government. Your contributions are automatically deducted from your paychecks.

Some employers offer matching programs as part of their benefits package: they will contribute a certain amount to help grow your funds. This could be a matching program, where the company matches how much you contribute up to a dollar amount or percentage of your salary. Or it could be a set contribution, where they put a percentage of your salary into the retirement account regardless of if you put anything in.

Contributions into this type of retirement account are an investment in your future lifestyle—and because they are made pre-tax (meaning you are not taxed on the amount you contribute now), they lower your taxable income in the year you make the contribution. This makes it an immediate tax benefit and a future savings benefit.

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