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Think You Can’t Afford to Contribute to Your 401K?- Think Again

by Fern LaRocca CFP®

in 401K,401k Contribution Limits,401k Contribution Limits,401k limits,401K Maximum

Many people worry about contributing to their 401K.  Your employer can tell you when you vest and what your 401k contribution limits are. Many people think that can’t afford to contribute. They worry that they won’t be able to live on the lesser amount of income. What they don’t realize is that if they contribute say, for example, $10,000, and they make $50,000 a year: they only pay tax on $40,000 not $50,000. so the tax savings is giving you back some money to make up for that $10,000 contribution. How much? Well, that depends on your tax bracket. Obviously, the higher the tax bracket that you are in, the more advantage you get. As your earnings grow so does your 401K balance. To get the maximum 401K balance, add your bonuses and increased earnings to the amount you contribute.

Hint! Hint!- Don’t ever get a tax refund– that’s a interest free loan to the government. Have your tax preparer give you the extra monthly cash by changing your withholding exemptions to the proper amount to adjust for your 401K contributions.

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Another good idea is on every salary increase, automatically increase the deductions by the same percentage and you won’t even notice the monthly deduction. For most people, money in their hands is money spent.