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The Importance of Consistent Contributions to Your 401k

The Importance of Consistent Contributions to Your 401k

Should I Continue Contributing to My 401k?

In 2024, the 401k contribution limit is increasing to $23,000, and if you’re 50 or older, you can contribute an additional $7,500, bringing the total to $30,500. It may seem like a daunting amount to save, but investing as much as you can in your 401k is highly recommended for a secure retirement.

Why Did My 401k Contribution Drop Off?

Turning 50 last year, you may have noticed a significant drop in your 401k contribution. Let’s delve into the reasons behind this change and explore the journey from the beginning.

Upon graduating from college in 1997, you started working and contributing to your 401k. Initially, you were hesitant about putting aside a substantial amount of money. The allure of going out, replacing your old car, renting a spacious apartment, and buying fashionable clothes was tempting. Living like a poor college student was not part of your plan anymore.

Fortunately, your dad convinced you to start saving for retirement, saving you from a potentially significant mistake. Thanks to his advice, you reluctantly began contributing to your 401k. It may have been challenging to park your rusty old car among the sea of nice vehicles in the work parking lot, but you learned to ignore the comparison and live frugally. Over time, you gradually increased your 401k contributions until you reached the maximum limit.

Initially, your 401k account took some time to gain momentum. In the early years, you struggled with investment decisions, chasing performance and selecting funds based on their previous year’s success. However, this approach proved to be ineffective. Most mutual funds tend to follow a strong year with weaker performances. It’s essential to consider long-term performance rather than short-term gains. Fortunately, the impact of performance was minimal when you first started, as the 401k contribution limit was only $9,500 in 1997. At the beginning, the priority was to save as much as possible and build your portfolio.

Fast forward to 2023, when you turned 50 and could take advantage of catch-up contributions. However, the opposite happened, and your contributions decreased. You only contributed $10,000 to your 401k last year, the lowest amount in 20 years. Let’s explore the reasons behind this reduction.

Concerns About Required Minimum Distributions (RMD)

One factor that may have influenced your decision to reduce contributions is the worry about Required Minimum Distributions (RMD). In 22 years, the IRS will require you to take annual RMDs. If your 401k balance is too substantial, you may end up paying more in taxes. However, you have a plan in place. You intend to start withdrawing from your retirement accounts in five years, mitigating the potential impact of RMDs when you reach the age of 73.

The Benefits of Contributing to a Roth IRA

Lastly, it’s important to consider contributing to a Roth IRA as long as you have earned income. This retirement account has no downsides and offers significant advantages. In 2024, the maximum contribution for a Roth IRA is $7,500 for individuals aged 50 or older. Don’t miss out on the benefits of a Roth IRA.

Remember, the key is to maximize your contributions to both your 401k and Roth IRA. By doing so, you are taking proactive steps towards securing a comfortable retirement. If you’re unsure about the best approach for your financial situation, consider consulting with a financial advisor to help you make informed decisions.

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Image Credit: Melissa Keizer

Source: Retire by 40

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