401Ks can be both valuable and versatile. You can take out a 401K loan to pay off debt in some instances. You might also sit on your 401K and make contributions into it every year, planning for your eventual retirement.
You should also know that there's a deadline every year for putting money in your 401K. Beyond that deadline, you can't put in any more money, and you'll have to wait to contribute more the following year. Let's talk about that deadline and what it means for you.
What is a 401K?
Before we go any further, we should make sure you understand what we mean when we use the term "401K." A 401K is a kind of investment account that is specifically geared toward your eventual retirement. Most people want to retire from work at some point, and a 401K is a financial tool that should set you up nicely when you're ready to do that.
A 401K is similar to an IRA. However, an IRA is a retirement account that you open on your own. A 401K is a retirement account you set up through your job.
Some employers allow you to set up a 401K with them. To encourage you to contribute to it from your regular paychecks, they may match your contributions up to a certain point. Essentially, your employer is giving you free money and helping you invest for your future. Some employers might match 1-3% of what you put in, but more generous ones may give you as much as 5%.
Why is There a Deadline Every Year for 401K Contributions?
The IRS wants to impose a deadline for 401K contributions each year for simplicity's sake. Luckily, that deadline is not difficult to remember. It is Dec. 31, 2022, the last day of the year.
You have until the year's end to contribute as much to your 401K retirement account as the law allows. Doing so should be a priority if you want to put money away in anticipation of your work life's eventual conclusion.
How Much Can You Put in Legally Each Year?
Assuming you're thinking about retirement, you probably want to know how much money you can put into your 401K each year. The IRS will let you put in up to $20,500 in 2022. If you are 50 or older, though, you can put in an extra $6,500, sometimes referred to as a catch-up contribution.
Why Contribute to a 401K?
Other than the obvious reason of saving for your retirement, there are also tax benefits if you contribute to a 401K. When you put part of your paychecks into a 401K plan, that contribution comes from your pay before the government collects any income tax. In other words, your taxable income is less, lowering your total tax bill.
Contribute as Much as Possible Before the Year's End
Some people who are hard up for cash cannot put any money into a 401K. For instance, you might be reluctant to lock any of your current income away if you have any urgent debts you're trying to pay off.
If you can afford to put any money into your 401K, though, it's definitely worth it. For one thing, it will reduce your tax burden. Also, your employer might match what you put in up to a certain point, and that's free money.
Understand the total amount you can put in this year, and consider doing so if you haven't yet. You have until Dec. 31 to make that contribution and start building up a financial cushion to use during your Golden Years.
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Original Source: Credello: The 401K Contribution Deadline is Coming Soon. Are You Ready?