One Tax Season Tip to Save $9,000

I spend a good deal of time preparing taxes this time of year.

My own, sure, but also lots of other people’s. I prepare taxes as a side hustle.

As far as side hustles go, it’s pretty good. The money is solid for a side gig. I can work as much or as little as I want. I get to work with numbers, which is something that I miss in my current day job.

And yes, I recognize that that last line may not be a selling point for most people.

I have learned a lot through this job, but there is one lesson in particular that I want to talk about today.

Nobody is putting enough money in their 401(k)!

The Benefits of a 401(k)

I work in a pretty well-off area. Plus, if you are paying someone to prepare your taxes, you probably are above the median, anyway.

And yet, under 5% of my clients max, or come within a few thousand dollars of maxing, their 401(k). Most clients with access to a 401(k) contribute between $1,000 and $3,000 over the course of a year. Assuming an 8% return, $2,000 per year will net you a little under $600,000 by the end of a 40-year career.

$18,000 per year will net you over $5.3 million over a 40-year career. You’ll hit that $600,000 number during year 16. (Feel free to play around with a compound interest calculator to get a feel for your own numbers.)

This is also disregarding the tax savings that you get from utilizing a 401(k).

If you are a married couple making $150,000, you can contribute up to $36,000 per year into your 401(k)s. Maxing both accounts would save you $9,000 per year on taxes.

$9,000!

This is how tax savings work, right?

People do a lot of weird things to try to save a little bit of money, but are leaving $9,000 on the table.

(In case you’re wondering, $36,000 per year at 8% nets you over $10.6 million.)

A National Problem

A friend recently sent me an article showing that this is not a local trend. (And with a sub-headline of “A dark, detailed new look at why many employees may never be able to retire” how could I not read it?)

The article starts with the gut punch of a statement that “[t]wo-thirds of all Americans don’t contribute anything to a 401(k) or other retirement account available through their employer.”

First, let’s pull out the estimated 21% of workers who don’t have access to a 401(k) through their employer. Not their fault. They’re off the hook.

Of the people that do have access to a 401(k), only 41% are making any contributions at all. This means that the 41% includes my $1,000 per year clients, who are using the accounts, but not nearly enough.

This is pretty horrifying in an era where pensions are no longer a realistic option for most people.

What Can We Do?

But you didn’t come here to be lectured. Plus, we’ve learned that when you talk down to people and tell them that they make bad decisions, they elect a reality television star leader of the free world don’t respond well.

So what can we do?

First, I would recommend that you stop thinking about your 401(k) contributions as a percentage of your salary.

We’re taught from our first day on the job to think in terms of percentages when it comes to our 401(k). We’re asked what percentage of each paycheck we want to put into the account. We are told that the employer will match 50% of the first 6% that we contribute. It’s a weird system. And it makes the numbers more abstract.

Look at the actual dollar value from your last pay stub. Multiply that by the number of paychecks you get each year. Compare that number to $18,000.

This will make the numbers more concrete and give you a better idea of where you stand. You don’t need to max the account if that is out of your reach right now, but it helps to actually know where you stand before working to save more.

Next, we need to actually increase our contributions. One way to do this would be to look for savings, either on the big things or in recurring expenses and then increase our 401(k) contributions by the amount of those savings so that we actually save that money.

We could also wait until our next raise, and increase our contributions at that time. If you get a $2,000 raise, increase your contributions by $1,500. This method allows us to increase our savings without actually decreasing our spending. Painless saving!

Finally, if you don’t use a strict budget, you could simply raise your contribution by a little bit each paycheck until it is noticeable. Try contributing an extra $20 per paycheck. If that doesn’t hurt, try another $20. Rinse and repeat until you hit a ceiling where your budget can’t take any more saving. Then you can switch to either (or both!) of the two methods discussed above.

In our current technological environment, most large employers will allow you to adjust your savings through an internal company website. If you don’t have that option, simply reach out to H.R. and ask how to go about changing your contributions.

It is easy to procrastinate dealing with our retirement accounts until eventually we forget or we miss out on years of compounding growth. Take a step towards saving more today.

13 thoughts on “One Tax Season Tip to Save $9,000”

  1. I’m one of the unfortunate many that doesn’t have access to an employer-sponsored retirement plan (grumble grumble). But! My bank does offer a Roth IRA, so I signed up for one of those. It sucks because I don’t get any kind of matching, so I’m not able to max it out yet (boo).

    This year was the first year we’ve owed money on taxes. Before then I toyed with the idea of decreasing our taxable income by using our retirement accounts more religiously. After getting hit with a $900 bill (which I know isn’t all that bad), we’re planning on putting more in retirement. We have access to an FSA through Mr. Picky Pincher’s work, and I think we want to start taking advantage of that too.
    Mrs. Picky Pincher recently posted…Moving Tips On A BudgetMy Profile

    1. It’s definitely tougher with no help from your employer, but glad you’re working towards getting more money into retirement accounts anyway! The FSA can be nice if you know that you’ll have medical costs (especially if you have recurring costs like contacts/solution). As someone whose medical costs are more sporadic, I would be nervous about putting money into an FSA and then losing or wasting it at the end of the year.

      Thanks for stopping by!
      Matt recently posted…One Tax Season Tip to Save $9,000My Profile

  2. I know a couple who make a good income and get hit by the AMT. I suggested maxing out/increasing their 401k contributions. But they live above their means and say they couldn’t possibly contribute that much to their 401k because they’re ALREADY living paycheck to paycheck. As for me, I do regret not maxing out earlier…although I did gradually increase my contributions as my pay went up.
    Andrew@LivingRichCheaply recently posted…Not All Turnkey Rental Investments are Created EqualMy Profile

    1. It’s always painful seeing people paying the AMT and not putting any money into retirement accounts. Double-whammy on the tax bill there.

      I got lucky with regards to maxing out. I took a low paying fellowship for a year before being made full time. My move to full time included about a $25k raise, which meant that I could max a 401(k) and an IRA without changing my lifestyle at all. I just happened to stumble across the financial independence blogosphere at exactly the right time in my career, before lifestyle inflation really kicked in.

      Thanks for the comment, Andrew.
      Matt recently posted…One Tax Season Tip to Save $9,000My Profile

  3. I do taxes, and have a lot of retired clients. No one ever tells me they wish they’d saved less.

    I will say that it’s important as you (or your loved ones) approach retirement to think about taxes and your 401(k) withdrawal strategy. While folks who read the comments on personal finance blogs probably understand that withdrawals are usually taxed as income, I’ve had several clients who didn’t (and ended up shocked by their tax bills.)
    Emily @ JohnJaneDoe recently posted…Girl Power, Self Image, and “Oh My God, Still?”My Profile

  4. I finally was able to max out my 401k about five years ago. I can’t imagine decreasing at this point. Watching how quickly my balance has grown over the past couple of years only encourages me to keep pushing through even if it prevents us from doing a couple of things that I’d like to do. I know in the long run that it will definitely be worth it.
    Mustard Seed Money recently posted…Are You Pursuing Your Passion?My Profile

  5. It’s crazy when you think that most households can put away $36,000 right off the bat in tax-advantaged savings! That’s huge! People really get held back by the belief that it’s too much, but once you start doing it, it’s surprising how little you notice it. People just get used to what they see in their paycheck over time. It’s sort of like portion sizes on a plate.
    Financial Panther recently posted…What’s The Most You Could Save In Tax Advantaged Accounts?My Profile

    1. Very true, and great comparison with portion sizes. This is why I’m a big advocate of increasing your contribution when you get a raise. You can take huge jumps forward in savings and not feel any pain, because you never get used to the bigger paycheck.

      Thanks for the comment!
      Matt recently posted…One Tax Season Tip to Save $9,000My Profile

  6. It sure does add up. Mr. Groovy was fine with jumping right in on maxing out his 401K some years back but I needed to take the incremental approach. I raised it 1% for several years until I felt secure about not needing the extra cash flow. Once that happened I went all in.
    Mrs. Groovy recently posted…A New Low for Stacking BenjaminsMy Profile

    1. You are perfect examples of how different tactics can get you to the same place. 🙂 I feel like most personal finance writers want to push you to go all in at once, where it just goes against some people’s nature. Glad you’ve made your own approach work!

      Thanks for the comment!
      Matt recently posted…One Tax Season Tip to Save $9,000My Profile

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge