Should I stop contributing to my 401k?

The easiest way to become a millionaire is to increase your 401k contributions each year. There is a lot of money to be saved but trust me. Your 401k will grow and become the foundation of your portfolio. Just start with 10% of your salary and increase it every year. Within a few years, you will be able to achieve the maximum. A 401k retirement account has many advantages.

  • Contribution is Deferred tax. You won’t have to pay tax on it until you withdraw later.
  • Contribution is Automatically deducted From your salary. You won’t miss the money because you won’t see it in your checking account.
  • Many employers match Part of the contribution.
  • that it transferable. When you change jobs, you can roll it over to a new 401k or IRA.
  • Rule 55. If you’re 55 or older when you leave your job, you can withdraw from your 401k without paying the early withdrawal penalty.

This year (2024), the 401k contribution limit increases to $23,000. If you’re 50 or older, you can contribute an additional $7,500. Wow, $30,500 to get rid of the sock. This isn’t easy, but I highly recommend investing as much as you can into your 401k. Retirement will be here before you know it.

However, I turned 50 last year and my 401k contributions dropped dramatically. What happened? Why did I reduce my 401k contribution? Let’s start from the beginning.

I started early

I graduated college in 1997, got a job, and started contributing to my 401k immediately. However, I was very hesitant to do so. Why should I put so much money aside? I wanted to go out and have fun, trade in my old car, get a big apartment, and buy nice clothes. I didn’t want to live as a poor college student anymore.

Fortunately, my father convinced me to start saving for retirement and saved me from a terrible mistake. thanks Dad! He told me the benefits of a 401k and I reluctantly started contributing to my 401k. It was insulting to park my rusty old Toyota Cressida in the work lot because it was full of nice cars. But I got over it and learned how to ignore the Joneses. I lived frugally for a few years and gradually increased my 401k contributions until I maxed out.

My 401k was slow to get going. I languished for a few years because I didn’t know how to invest. I chased performance and selected the best funds from the previous year. This is the wrong way to do it. Most mutual funds tend to follow a strong year with poor performance. You need to look at long-term performance. Fortunately, performance doesn’t matter much when you’re just starting out. The 401k contribution limit was just $9,500 in 1997. It didn’t make much difference whether the gain was 3% or 10%. First of all, it is very important to save as much as possible and build your investment portfolio.

Anyway, it was good that I made mistakes early on and got them out of the way. Now, I’m not chasing performance. That’s why you need to start investing as soon as possible. Mistakes won’t be very costly while your wallet is small.

Turning fifty

In 2023, I turn fifty. Finally, I can take advantage of the catch-up contribution and save even more. However, it turned out the opposite. I only contributed $10,000 to my 401k fund last year. This was the least I had contributed to my 401k in 20 years. Why did I reduce my contributions?

The main reason is that I didn’t make that much income. I only made about $17,000 last year. (Our passive income was much more than that). I could have contributed more, but the tax benefits weren’t worth it. If I contribute an additional $5,000, I will defer approximately $1,300 in tax. Not that much. I’ll have to pay the tax later when I get $5,000 anyway. On top of that, I have over $1 million in my 401k. At this point, the rate of return is more important than saving a little more.

Furthermore, I started to worry about the RMD (Required Minimum Distribution). In 22 years, the IRS will require me to take an RMD annually. If my 401k is too large, I’ll have to pay more taxes. Well, I’m not too worried. I plan to start withdrawing from my retirement accounts in 5 years. RMD shouldn’t be a big deal when I’m 73.

This year, my income will probably be around $10,000. It may be time to stop contributing to my 401k soon. However, it is difficult to stop saving. I’ve been doing this for a long time. I should think about it as part of my gradual retirement. I will slowly reduce my annual retirement savings over the next few years. By 2029, I will be ready to start withdrawing.

Finally, I will contribute to my Roth IRA as long as I earn income. This account has no downside at all. This year, the maximum contribution to a Roth IRA is $7,500 if you’re 50 or older. Don’t miss out on a Roth IRA.

Do you contribute the maximum to your 401k and Roth IRA?

Passive income It is the key to early retirement. These days, I invest in commercial real estate with… Crowd Street. They have many projects all over the United States. Go check them out!

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Photo credit Melissa Keizer

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Joe started Retire by 40 In 2010 to learn how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38 years old.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects all over the USA so check them out!

Joe also highly recommends Personal Capital to DIY investors. They have many useful tools that will help you reach financial independence.

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