This may surprise some readers but this is actually the first year I’ll have maxed out my 401(k) contributions. That’s right, nearly 10 years into my working career this is the first time I’ll have contributed the max allowed by the IRS (the tax authority). That amount is $19,500 for 2021. On the other hand this might surprise readers that I am contributing that much – that’s a lot of money to put aside to not plan to touch until I’m 59. 

In this post let me explain why I’ve finally done it, and why it’s taken me this long. 

Why use a 401(k)

I don’t personally enjoy paying taxes but I do always pay them – I appreciate the services and safety that a functioning government provides for me. However if there are legal ways to decrease the amount of taxes I’ll owe, I’m all for that. Oftentimes the government will tie tax breaks to things they want us as citizens to do. For example, putting money aside for healthcare expenses or retirement is a win-win, we’ll have money when we need it and the government won’t have to support us via a safety net. 

So, in an effort to ensure the government doesn’t have to provide too much support in our golden age, they offer tax incentives now. These tax incentives come from our employers through an employer sponsored retirement plan, the 401(k). For up to $19,500 each year you can either: pay tax on it now and let it grow until you start pulling it out at age 59 and then not pay tax then (Roth) or you can avoid tax on it now but pay it years from now when you retire (Traditional). 

It’s hard to say (IMO) which strategy is better – tax now vs tax later so I do about a 50-50 split. Either way I’m essentially saving 20-40% depending on what my tax rate is. That’s a good deal in my mind, and it’s not like I’m losing money or anything – one day I do plan to retire and I’ll need money to allow me to do so. I might as well not paying tax on it if I don’t have to!

Why I waited so long

In hindsight (which is always 20/20), perhaps I was missing out and leaving money on the table by saying no to more tax breaks. By not maxing out my 401(k), maybe I was saying ‘no thanks’ to tax breaks. I suppose in reality I was, but I just wasn’t in a great spot to do so. 

One thing that I’ve learned during my financial journey is that just because something makes sense on paper doesn’t mean it’s the right call to make. Personal finance isn’t always black and white and it can be more complex. For me, I had other more pressing goals during my early working years – goals like: saving for a down payment on a house, building up my emergency fund or paying off student loans. Were these goals saving or ‘earning’ me 20-40% as a return (compared to what I’d save by doing a 401(k) contribution? Perhaps no but they were necessary and important. I view those goals that I conquered first as a good foundation and without a good foundation in place it’s tough to build up a house. The peace of mind I got by knowing I’d taken care of other things first was super important to me and has set me up with more confidence and comfort in risk taking. 

Photo by Towfiqu barbhuiya on Unsplash

Why I’m excited to max it out now

As I mentioned, I waited a bit to finally max out my 401(k) and I’m glad I did. I prioritized other financial goals that might now have made as much sense in paper, but that allowed me to build a good foundation for future success. 

I’m excited to be at a point where I can max out my 401(k) and take full advantage of the tax benefits. It’s still a lot of money to be without but I know my future self will thank me! 

Summary

Just because something makes sense on paper doesn’t always mean it’s the right decision. Consider your own financial situation and what makes sense for you. However, contributing to a 401(k) is generally a good idea – both to put aside money for retirement but also to save money on taxes at the same time! Take advantage of a 401(k) or other similar employer sponsored plan if you have one available to you. Your future self will thank you! 

This content was originally published here.

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
In this article: