IT’S IMPORTANT TO DETERMINE HOW MUCH MONEY YOU MAY NEED TO SAVE FOR A COMFORTABLE RETIREMENT
How to Help Maximize Your 401(k) Plan
One of the simplest and most effective ways to save for retirement is to contribute to your company’s 401(k) plan. A 401(k) plan allows you to defer a portion of your paycheck to your retirement account each pay period automatically, while potentially reducing your tax bill this year. But are you getting the most out of your 401(k)?
Here are three strategies that may help you optimize your plan in the years ahead:
Get the Match
Does your employer offer a matching contribution to your 401(k) plan? If so, find out how much you need to save to qualify for that match. The most common match formula is 50 cents for every dollar saved, up to 6% of your pay. Employees in this type of plan need to contribute at least 6% of their salary to the 401(k) plan to get the maximum possible 401(k) match. If your employer does not currently offer a matching contribution, it still makes sense to contribute to your plan on a regular basis for three important reasons: There are tax advantages, your money potentially grows tax-deferred, and interest on your savings compounds.
Increase Your Deferral Rate
Taking advantage of a company match helps you capture valuable contributions from your employer, but it may not be enough. Many 401(k) providers recommend saving at least 10% annually over the course of your career. But, the average 401(k) contribution is closer to 6%. If you aren’t able to save 10% to 15% of your pay at the beginning of your career, aim to gradually increase your deferral rate over time.
Max Out Your Retirement Plan Contribution
In 2020, the maximum amount you can contribute to your 401(k) plan is $19,500. If you’re 50 or older, you’re eligible to make “catch-up” contributions up to an additional $6,500—for a maximum possible 401(k) contribution of $26,000. Those contribution limits remain unchanged for the 2021 tax year. When you max out your 401(k) plan, you not only save more for retirement, you potentially pay less in taxes that year since your taxable income would be lowered. That’s because all contributions to your 401(k) plan are taxed when they are withdrawn, not when they are made.
Disclosures: Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor. Brett Goetz is a Senior Vice President, Wealth Management in Plantation, Florida at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at Brett.Goetz@morganstanley.com or by telephone at 305-632-9895. This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at morganstanley.com/disclosures/dol. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account. The strategies and/or investments discussed in this material may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. ©2021 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 3315951 (11/2020)
By: BRETT GOETZ Morgan Stanley
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