For 2022, the IRS increased the 401(k) contribution limit to $20,500 for workers under age 50 (workers over age 50 can contribute an additional $6,500 in "catch-up" contributions). But you don't have to be a super saver to reap the benefits.
It's okay to start small. "The key is to establish a habit," says Dave Totah, a certified financial planner at Exencial Wealth Advisors in Frisco, Texas. Here are three easy ways to get started.
you pay first
Set yourself up for success by automating your contributions to your retirement account. That way, every time you get paid, an amount you designate goes directly into your retirement savings and not into your spending bank account.
If you don't take this approach and just try to save what money you have left at the end of the month, it won't work, says Totah. "Plan to save," he says. Recent surveys reveal that more than half of Americans live paycheck to paycheck, so there may be nothing left if you leave your savings to chance.
Take aim at the corporate game
Many employers offering 401(k) plans match employee contributions to some degree. For example, of the companies that use the Vanguard platform, 86% offer a match and the most common formula is $0.50 per dollar in the first 6% of salary.
Financial advisors recommend that you contribute at least enough to your 401(k) to receive business mail, because it's free money. But if you can't contribute that much, don't let that stop you from getting started. "Even if you can only contribute 1% or 2%, do it," says Kristen Carlisle, CEO of Betterment for Business. You can increase your contribution rate whenever you receive an increase, or set your rate to increase automatically at some point during the year.
Look beyond the 401(k)
Unlike a 401(k), you can open an individual retirement account (IRA) or health savings account (HSA) on your own without your employer. They are an important savings vehicle for the self-employed, temporary workers and between jobs. Also, Roth IRAs are generally suitable for young starters.
Unlike a traditional IRA, which is funded with pre-tax dollars, Roth IRAs are funded with after-tax dollars. Pay your taxes early when you're young and at a lower tax bracket than you're likely to have as you advance in your career.
The money in your Roth IRA grows tax-free and can be withdrawn tax-free in retirement. By 2022, workers under the age of 50 can contribute $6,000 to an IRA, while those over 50 can contribute $7,000.
An HSA allows you to save for medical expenses now or in retirement. They're triple tax-free: You get a tax deduction on your contributions, the money grows tax-free, and you can withdraw the money tax-free as long as it's spent on eligible medical expenses.
And as long as you use them for eligible health, dental and vision expenses, there's no expiration date. To contribute to an HSA, you must be enrolled in a high-deductible health insurance plan. You can contribute up to $3,650 to your 2022 HSA.
You can contribute to an IRA or HSA alone or in conjunction with a 401(k) if you have access through work.