401k Contribution Limits Have Increased/ It Works For Me
Updated: Jan 15
The contribution limits for 401Ks, 403(b), most 457 and Thrift Savings Plans have increased for 2022! Listen - y’all know how I feel about a 401K (if you don’t, join the Facebook group,) and this is big… I’ll take a moment to reiterate why I LOVE an employer-sponsored retirement plan.
First - I don’t believe in taxes. Well - I believe in them...but I also believe in avoiding them (legally) and your company-sponsored retirement plan is the BEST way to avoid paying taxes on your income. Traditional 401Ks (and some of other employer-sponsored plans) allow you to defer taxes. You (and your employer), contribute to the 401K without paying taxes on what is contributed. Translated - this means that if you EARN a dollar, that FULL dollar will be invested and allowed to grow. When you withdraw the funds, the withdrawal will be taxed as income.
Why do I love this? Because I know what my current tax rate is, I’m a little less clear on the future taxes. And I’m interested in reducing my taxes, right now. I’ll figure out how to finesse the future tax bill - in the future. (Again - legally). In all seriousness, we don’t have a CLUE what the tax laws will be in the future, nor do we know what our future income will be (which will be the basis of your tax bill). So I focus on reducing current taxes. I LOVE a traditional 401K plan because it defer taxes on my current income.
Secondly - I have a list of priorities and retirement savings is at the top of my list. Put a different way - investing in my retirement is my primary financial goal. I have been super transparent with you guys about my personal financial weaknesses, (Again, if you missed it, check out the blog). And since I'm clear on my tendency to spend mindlessly, my 401K allows me to address one of my financial priorities AUTOMATICALLY. I'm able to move my money out of my reach (and avoid taxes) before I even see it. Some people may advise you "pay yourself first" - but more explicitly, I think we should pay ourselves, automatically, and before you see it. My 401K allows me to prioritize my retirement, without thinking about it and increasing the contribution limit allows me to maximize that priority.
I'm telling you a LOT about what works for me. That's because I've spent a LOT of time thinking about it. I've weighed opportunity costs - sinking ALL your money into a 401K means that it won’t be available for competing priorities: college tuition, real estate investments, travel, etc. And that choice isn't right for everyone. No financial decision is right for every person. But - in terms of return on investment, risk and opportunity costs, etc. - maxing out a retirement plan is what is right for me. So, for 2022, I'm going to strive to match the new limits. It will be painful (I have some hobbies that will take a hit) and I'm ok with that.
I’m focused on my primary goal, and willing to sacrifice the secondary goals. I wanted to let you know that the limits have increased and that may be an opportunity for you!
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