If you’re on the fence about contributing to your workplace retirement plan, you may have a change of heart after you realize the tax benefits you can gain. Fidelity reported an increase in 401(k) millionaires during the pandemic, and you could be next in line if you tap into a simple tax strategy. It can work miracles on your tax return and can motivate you in new ways.
Here’s a different way of thinking about your 401(k) that could accelerate your way to your million-dollar retirement nest egg.
Behind the scenes of employer plans
If you want to get closer to the million-dollar mark, your job may be a key part of your journey. Some employers offer retirement plans, like a 401(k) or 403(b), to help you jump-start your future savings goals.
Let’s say your employer offers a 401(k). For 2022, the IRS boosted the maximum contribution limit to $20,500 if you are under 50. You can stash away more money in a 401(k) than an individual retirement account like the Roth IRA. This makes it easier to ramp up your savings and get closer to your million-dollar treasure.
The good thing about a 401(k) is that the money is automatically deducted from your earnings before your paycheck hits your checking account. You won’t have to pay any taxes on the money you contribute until you withdraw it during retirement.
Your employer may even offer a company match. This is essentially free money that a company gives as an incentive to contribute to your retirement accounts.
The 401(k) million dollar mindset trick
If you still don’t know if annual contributions to your 401(k) are worth it, think about the tax benefits you can gain. A thrift savings plan (TSP), 401(k), and 403(b) are typically employer-sponsored accounts that allow you to make pre-tax contributions. That means the IRS will allow you to temporarily skip tax payments on the money you contribute until you withdraw it.
Here’s the mindset shift that will have you running to your workplace retirement plan. Every dollar you contribute to your retirement plan can reduce your taxable income for the year. Let’s say you earn a $100,000 salary. If you contribute the maximum amount ($20,500), the IRS will only tax you on $79,500 at the end of the year. This contribution strategy comes in handy if you’re struggling to find ways to reduce your taxable income.
By pumping your 401(k) with more money, you might also learn how to live more intentionally with the money you receive from your paycheck. If you’re not at the point where you can contribute the max, you should consider contributing up to the company match if that works for your financial situation.
What it takes to reach the million-dollar mark
It may seem impossible to touch a million-dollar retirement account when you can only contribute five-figure amounts every year. But that’s where time, investing, and taxes come in. They are all key ingredients to catapult your workplace retirement plan to the seven-figure finish line.
Let’s say you have a 10-, 20-, or 30-year time horizon. This gives you more time to beef up your retirement contributions and recover from any painful losses in the market. You have a better chance of success when you can invest your contributions over a longer time period.
Taxes can be the motivation you need to increase your contributions every year. As you earn more money, your tax savings from contributing to a workplace retirement plan might well be your biggest tax break. Suddenly, a $20,000 contribution isn’t that bad anymore if you know it will save you from the IRS this year.
Search for investments that align with your goals
Don’t dive into your 401(k) plan with your blinders on. Find out what type of assets are offered in your plan and do your research. Look at the performance of those assets over a certain period.
Here are some common investment choices available for 401(k) plans:
If your risk tolerance is high and you have a longer time horizon, you can consider adding more stock investments to your portfolio. It wouldn’t be unrealistic to shoot for 8% returns. The average stock market return was in the ballpark of 10% over the last 50 years.
This 401(k) strategy can take you far
Reaching a million-dollar 401(k) may be easier than you think when you break down the steps into bite-sized pieces. Educating yourself, contributing consistently, and understanding your investment options are key to growing your 401(k) portfolio.
The best part is knowing that you can temporarily escape taxes on the money you dump into your 401(k). That victory alone may be enough to get you excited about building a million-dollar portfolio at work.