401k plans are simple savings plans which allow an employee to save up money tax free for their retirement. But how much can an employee sace in this plan? Well the answer is a lot.
The 401k works so well, because it allows investors to save money and have it grow tax deferred. However there is something called a maximum 401k contribution places a limit on how much someone can put into their 401k every year.
For 2009 the maximum 401k contribution limit is $16,500. Some employers will actually place more limits on how much a person can deposit every year. For instance if you are making $70,000 a year and your employer does not allow you to save more than 20% of your income to your 401k then you would be limited to saving $14,000 a year.
If you are able to save the maximum amount every year it has the potential to pay off huge dividends in the future. If you where able to make the $14,000 minimum payment every year that would mean after 40 years you would have saved $560,000. If your employer matched you $1 for $1 that would be another $560,000 for a total of $1,120,000. And with the interest that you earn from a 401k that number could potentially be much, much larger.
Of course this would be an ideal situation if everything goes according to plan. Life does happen; you may be unemployed for a year or forced to take out an early 401k withdrawal. But it does show that the plan can be powerful if you keep investing into it.
By investing the maximum into your 401k you can be sure that there is some sort of safety net around you, helping you to buy the things you want after you retire.
401ks can be a very slow path to retirement, but they can add up over the years. And by saving a large amount of money into it every year you can avoid the fear of not having enough money to retire.
