What to Do With Your 401(k) When You Get a Raise

What to Do With Your 401(k) When You Get a Raise

Participating in an employer-sponsored 401(k) is a great way to save for the future, especially if they offer contribution matching. As a participant in the plan, you may have set your contribution percentage when you first started your job, then forgot about the account altogether.

As you near annual review season, which is often paired with a raise, it’s important to reevaluate your budgets, income, and contributions to your retirement accounts. Pay increases provide opportunities to make adjustments, so make sure you understand your financial snapshot before spending the increase on a fancy vacation, shopping spree, or other temporary avenues.

If you get a raise, it may be exciting to see extra money on your paycheck, and your instincts may guide you to splurging on yourself or planning a vacation, but when your salary increases, there are other ways you can treat yourself by planning for your future.

Read on to learn what you should do with a pay increase that will benefit your retirement savings.

Use Financial Calculators to Determine Budget Availability

When you have any sort of financial change, whether you are making more or less money, the first thing you should do is assess your budgets, debt, and income to ensure you have what you need to stay on track. Using methods like the 50/30/20 budget rule and a budget sheet is a great way to assign income to expense categories and keep track of your finances overall.

Once you know how much discretionary income you have every month, you’ll divvy out the total into categories like vacation savings or retirement accounts. Ideally, as your pay increases, so will your retirement contributions. Slavic401k offers financial calculators to help you determine how contribution limits change your take-home pay, how much you need to retire comfortably, and whether or not you’re on track for the future.

Increase Your 401(k) Contributions

If you haven’t maxed out your retirement contributions already, increasing them is a great way to use funds from a pay increase, and it doesn’t take a lot of money to make a big difference over time.

For example, by using the Slavic401k calculator 401(k) Contribution Effects on Your Paycheck, we determined the following: a participant contributing 6% of their $50,000 salary who increases contributions by 1% annually, will contribute approximately $14 more to their account each month, while adding an additional $143,000 by retirement age. That’s significant!

Open a Roth IRA or Contribute Funds to an Existing IRA

If you’ve maximized your contributions with a 401(k) plan, you have an option to open a Roth IRA, which can be managed and opened on your own. This type of account has a smaller maximum contribution, but by using extra funds from a pay increase, you can drastically change the course of your retirement savings over time. For 2024, the IRS has increased the contribution limit from $6,500 to $7,000 for participants under the age of 50, and $7,500 for those 50 and older.

Participants using a Roth IRA contribute funds with after-tax money, meaning that the funds grow tax-free through retirement. In addition, Roth IRAs do not have minimum distribution requirements, meaning you are not required to withdraw funds from your account when you reach retirement age. Learn more about Roth IRAs on the Slavic401k blog here.

As you continue your career, you will likely make more money along the way. As you earn bonuses or a raise, make sure you consider how the increase can benefit your retirement savings. Can you increase your contributions to a 401(k)? Should you maximize your Roth IRA savings or open an account? Where there is wiggle room, you should be saving for your future – your future self will thank you!

Questions? Visit slavicwealth.com to speak with a financial advisor. 

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