Jul

28

90% Salary Into 401k

July 28, 2007 |

No, I am not advocating everyone to do this. I think a disciplined approach to saving and investing is best under normal circumstances (10 to 25% of your weekly/bi-weekly/monthly salary into 401k, depending on level of income). I have a special circumstance, however: I am moving from regular employment to becoming a contract based consultant very soon. My 401k is not full for the year yet: I haven’t contributed the maximum allowed by the Federal government ($15,500). I had to decide to increase my contributions limit for my next bi-weekly paycheck to 90%, which would get my yearly contributions closer to the maximum. It would allow me to quit with a clear conscience that I have taken care of myself first.

IRA and 401k allowances is that they are perishable. Once the year is gone, if you haven’t contributed you lost that opportunity forever. There is no time machine that would allow you to go back in time to take that tax-free advantage.

This does require some adjustments. First of all, regular bi-weekly income that is normally used to pay a mortgage and car loan is gone. Fortunately, I have not succumbed to the luxury life that my income would otherwise allow, and I do save every month. Still have some remnants from previous paychecks on my checking account, and will have to eat a small chunk of emergency savings: after all, when you are in the upper tax brackets, legally sheltering money from Uncle Sam is an emergency!!!

I am not afraid of almost eliminating this bi-weekly paycheck. It is a good test of courage, since I am going independent again, with very infrequent payments. I do advocate this idea of contributing a big percentage to a 401k to anyone who may be changing jobs soon, retiring, taking family medical leave, sabbaticals, or other situations in that would prevent them from fully funding the account for the year.


Comments

2 Comments so far

  1. Brandon J on July 28, 2007 6:03 pm

    Military members can now join the TSP to add to the militay retirement. The Thrift Savings Plan has the same amount as a 401(k), $15,000. No one can in the military can honestly afford to max that out; however, I recommend trying.

    I like you site and I was wondernig if we could exchange links. I’m in the Air Force and I’ve created a blog to help military members with their finances. Thanks.

    Brandon J
    http://moneyformilitary.blogspot.com

  2. js on July 30, 2007 2:18 pm

    When you become a contractor you will be able to open a SEP IRA. These allow major annual contributions as a percentage of your salary. You can stash 40k+ a year in a SEP. Research it and go vanguard immediately to open your account. Good luck.

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