First thing is first, I’m a big fan of the 401k and not contributing to it if your company offers it is your first big mistake in investing. Your company is giving you a raise every 2 weeks when you use it. Who doesn’t want FREE money? You’d be surprised…
So the wife got a raise last month and I immediately put that money into the 401k contribution matching my 15% we’ve got going there. We don’t need the cash for any other projects currently and I know (and you do too) that if you have money, you’ll spend it. It’s the nature of the beast. Pay yourself first.
How Much Should You Be Putting In Your 401k?
A lot of sites mention different info on this front, but you’re on this site 😉 so my recommendations are as follows:
1. If your company matches, it’s immediate return on your money. My company matches the first 5% and so at the very least, I’d be putting in 5% and if your company offers differently hit that minimum, AT the minimum.
2. If you are getting close to the ROTH IRA phase out, you want to be able to offset your MAGI score to be able to keep contributing to it as long as you can. Bumping up your 401k contributions drop that MAGI score down. The ROTH phase out schedule is here:
- Single: If you’re not married, your contribution limit will be reduced when your modified AGI exceeds $101,000, and completely eliminated when your modified AGI reaches $116,000.
- Married filing jointly: If you’re married and file a joint return with your spouse, your contribution limit will be reduced when your joint modified AGI exceeds $159,000, and completely eliminated when your joint modified AGI reaches $169,000.
- Married filing separately, living apart: If you’re married and file a separate return, and live apart from your spouse at all times during the year, your contribution limit will be reduced when your modified AGI exceeds $101,000, and completely eliminated when your modified AGI reaches $116,000 (same rule as if you were single).
- Married filing separately, other: If you’re married and file a separate return, and live with your spouse at any time during the year, your contribution limit will be reduced when your modified AGI exceeds $0, and completely eliminated when your modified AGI reaches $10,000.*
3. If you can only put in a couple dollars to a 401k plan, do it. If you’re making 20k per year and don’t think you can’t afford it; EVEN if your company doesn’t match you’re putting $200 per year in (not including if your company matches) and that looks like this (click to enlarge):
and you’re putting in 5k after 25 years and have over 300% return on your money!
4. Don’t undercut your contributions with the bogus 401k debit card!
Money is money, and more money makes more money. If you CAN afford to put more in it, do it. If you CAN’T afford to put some much in it, put SOMETHING in because you’d be surprised how fast time flies by. You’ll be in retirement sometime soon and if you don’t have a plan now, you’re going to be wishing you did then.