Many people struggle to save for retirement, even when the economy is strong and life carries on as usual. But now that the country is deep in crisis mode, many people are suddenly struggling to keep their paychecks or manage their jobs remotely. Many are also rushing to stock up on key supplies so they’re able to hunker down at home for as long as possible, and that means spending more money, not less, on groceries and essentials.
As such, funding your 401(k) or IRA may not be at the forefront of your mind right now, and understandably so. But if you happen to be in the fortunate position of having extra money on hand or keeping your full paycheck throughout this ordeal, then now’s actually a great time to put extra cash into your retirement plan.
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Take advantage of the stock market downturn
The stock market has gotten hammered in the past few weeks, and that’s bad news for investors who were hoping to cash out their holdings, take their money, and run. On the other hand, a down market gives new investors an opportunity to make money by buying low and holding onto their stocks long enough for them to come up in value. And that’s the exact strategy you can easily employ in a retirement plan, since the money in your 401(k) or IRA will, ideally, be left alone for years or decades.
Imagine, for example, that you put $1,000 into your IRA and invest that money in stocks. If you buy those stocks now, when their value is down, you get a key opportunity to load up on quality investments when they’re more affordable.
Of course, you could take the same approach with a non-retirement account and add more stocks to your traditional brokerage account. But funding a 401(k) or IRA may actually be more feasible because of the tax breaks involved — namely, that traditional 401(k) and IRA contributions are made on a pre-tax basis, saving you money up front.
For the current year, you can contribute up to $6,000 to an IRA if you’re under 50 or up to $7,000 if you’re 50 or older. With a 401(k), you get to put in up to $19,500 if you’re under 50 or up to $26,000 if you’re 50 or over.
Those contributions, however, don’t need to be spread out evenly throughout the year. If you’re 38 with an IRA and want to max out this year, you’re not forced to divvy that $6,000 total into 12 monthly contributions of $500 each. Rather, you can put in that entire $6,000 now if you have the financial ability to do so.
The same holds true with your 401(k). Generally, your employer will take your total designated annual contribution and break it up over 12 months or however many pay periods you have during the year. But if you ask to front-load your contributions to max out earlier in the year, your employer will likely be able to accommodate you. Before you do that, though, ask if front-loading your contributions will impact any matching dollars you’d normally be entitled to. (This is only a concern for 401(k)s; IRAs are self-funded and don’t get employer-matching dollars.)
We’re living through challenging times, but it’s important to stay focused on retirement, nonetheless. If you’re able to ramp up your retirement plan contributions, now’s a good time to do so. But make sure you can really afford to part with that extra cash. You don’t want to make the mistake of raiding your emergency fund to pad your 401(k) or IRA, so make sure to leave yourself a good six months’ worth of essential living expenses in the bank before investing that money.
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