Strategies For Contributing The Maximum To Your 401k Each Year

The 401k maximum employee contribution is $22,500 for 2023 and will likely go up by $500 a year every couple of years. Given the median household income is roughly $75,000, a household has to contribute 30% of their gross income to contribute the maximum. That's not easy to do, which is why I want to share some strategies for contributing the maximum to your 401k each year.

With the average American household savings rate at only about 6% a year, clearly, maxing out a 401k is no easy feat. It's obvious if you look at the pitifully low 401(k) balances by generation. However, just know that if you max out your 401k over the years, you will accumulate more money than you can imagine.

Contributing The Maximum To Your 401(k)

Take a look at the chart below to see what your 401k potential balance is after so many years of maxing it out. Then look at the right side column to see what the ideal 401k amount is by age due to market returns plus company matching.

401k maximum contribution potential amounts

Now that you agree that maxing out your 401k is a wise move, especially since pensions and social security cannot be relied upon, let's look at some strategies that will allow you to max out your 401k.

The maximum 401(k) employee contribution limit in 2023 is $22,500.

Strategies For Maxing Out Your 401k Each Year

1) Autodeduct from every paycheck.

The key is to pay yourself first by electing a percentage of your paycheck automatically gets deducted to your 401k contribution. If your salary is indeed $60,000 a year, elect to have a 31% automatic deduction.

Because the deduction is pretax, the pain of contributing 31% of your gross salary to your paycheck will only feel more like you're losing out on 20% of your paycheck. I promise you that you will get used to living comfortably on a lower income amount.

2) Lump sum maximum contributions at year end.

If it is customary to receive a year-end bonus, you can always elected to allocate a percentage of the bonus to maxing out your 401k. Bonuses are generally taxed at the top marginal income tax rate because the IRS treats your bonus check as a regular payment. For example, if you get a $20,000 bonuses, the IRS might think you're making $20,000 X 52 weeks = $1,040,000!

3) Contribute the maximum in a hybrid manner.

If cash flow is a little too tight, then you can contribute at least the company match amount with your paychecks and then top off your 401k maxing with your year-end bonus. This way, you can breathe easier in case you have any unexpected emergency expenses.

4) Always contribute to at least the employer contribution match. 

An employer matching your contributions is like getting free money to sock away toward retirement.  Most often, employers will match a percentage of your contributions – generally within 3% to 6% of your annual pay – although sometimes they will choose to match your contributions up to a specific amount.

5) Always analyze your 401k for excessive fees. 

You could be paying hundreds of thousands of dollars over a lifetime in hidden fees in your mutual fund, investing and retirement accounts. After all, active fund managers and 401k administrators need to make money too.

By using a 401k fee analyzer, like the free one from Empower, you can determine just how much you’re paying in hidden fees and, the impact to your portfolio over time. I used Empowerl and discovered I was paying $1,748 a year in 401k fees I had no idea I was paying!

Below is a snapshot of my actual results after using Empower's fee analyzer. The Fidelity active mutual fund was the big culprit, so I switched to a Vanguard index fund instead.

401(k) Fee Analyzer By Personal Capital

The 401k Is Key Leg Of Your Retirement Stool

In the past, the three legs of your retirement stool were pre-tax savings, pension, and social security. Today, the new three-legged retirement stool now consists of:

1) Personal pre-tax savings (You)

2) Personal after-tax savings (You)

3) Personal hustle (You)

Everybody should figure out a way to contribute the maximum to their 401(k) savings each year, even without a company match.

Your goal is to minimize your taxable income, allow your investments to compound tax-deferred for as long as possible. Then build a large enough after-tax portfolio to give yourself options to change jobs, take a break, be a stay at home parent, or retire before the age of 59.5.

After-Tax Investment Amounts By Age To Comfortably Retire Early - maximum 401k contribution plan

The reality is that you can only depend on yourself for a comfortable retirement, not the government or a rich uncle. The larger you can build your after-tax investment portfolio, the sooner you can retire early.

Recommendation To Build Wealth

Manage Your Money In One Place: Sign up for Empower, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.

Personal Capital Retirement Planner Tool