Be Careful When “Maxing Out” Your 401K!

A word of caution before you “Max-Out” your 401K contributions. If you don’t plan carefully you may be leaving money on the table.

Ask most financial gurus and they will all tell you the same thing: “Max out your 401K!” Named (creatively I must say) after section 401 (k) in the United State’s Tax Code, the 401K has become the preferred investment vehicle for many Americans saving for retirement. Benefits include allowing you to defer taxes on your income like Traditional IRAs (Individual Retirement Accounts), and as an added incentive employers often will match your contributions up to a predetermined amount. A typical example would be a company matching your contributions dollar for dollar up to 3-6% of your annual salary. With this money you are then free to invest in various mutual funds, bonds, and money market accounts that your employer has pre-selected.

Before arbitrarily setting your payroll deduction percentage to the maximum you may want to consider the following. Current law allows individuals under the age of 50 to contribute up to $15,500 in their 401K plans (2008 Tax Year). Once your account reaches this limit your company will discontinue your contributions until the beginning of the next tax year. Unfortunately, they will also discontinue their matching portion as well since you are no longer contributing. Albeit a technicality, very few employers have created fixes for this. Protect yourself from “leaving money in the trees”.

 If you feel you may be close to reaching the IRS limits you can do a simple calculation. Multiply your current payroll deduction percentage by your projected annual salary. Be sure to consider any associated overtime or scheduled pay raises in your projection as well. If your calculation exceeds $15,500 you may want to consider reducing your payroll deductions so that you meet your IRS limit on your last paycheck of the year.

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