With so many payroll deductions, it is common for many people to feel their take-home pay is almost gone by the time it gets to them. You may have several options to maintain your take-home pay that go beyond changing your 401(k) contributions and W-4 withholdings.
Maxing out your 401(k) contributions
In 2022, the maximum annual contribution to a 401(k) plan is $20,500 if you are under 50 years old, plus a catch-up contribution of up to $6,500 if you are 50 or older. If you have enough cash to max out your annual maximum contribution, that is something you might want to consider. But, before you do, carefully review your employer’s plan, and determine if it is right for you. Sometimes, these plans are offered through third parties, and they may have high fees and investment portfolios not performing to your satisfaction. In addition, you have additional vehicles to invest in outside your workplace, like Individual Retirement Accounts (IRAs) and Roth IRAs, among others.
Not everybody is able to maximize their 401(k). However, you can max this benefit from your specific financial situation contributing as much as you can. The main recommendation for your 401(k) is to invest at least enough to get your employer’s match, as it is free money that can help you build your retirement fund. Since your contributions are taken out before taxes, your total taxable income will be lower, and you will pay fewer taxes. However, your take-home pay will be reduced by less than the amount you contribute.
Changing your W-4 Withholdings
Updating your W-4 with your employer can increase or decrease your take-home pay. To increase your take-home pay, you should aim to reduce your tax withholdings by increasing your dependents or using a deductions worksheet. If you find yourself getting a big refund at the end of the year, you are paying too much each month. Decreasing your withholdings on your W-4 can help you increase your take-home pay and reduce or eliminate your refund. If you find yourself owing a lot to the IRS, you are not having enough withheld. Increasing your deductions will lower your take-home pay but help you break even or owe very little to the IRS. Contact your tax professional if you need further guidance on what’s best given your specific situation. And if you want to estimate your withholdings, you can consult the IRS Tax Withholding Estimator. You can change your W-4 with your employer at any time but remember when the changes are made and how they can impact your taxes for that year.
So, to determine if increasing your 401(k) contributions and lowering your tax withholdings can help you maintain your take-home pay, review your finances, and do the math. If you want to contribute more to your retirement but cannot retain the same take-home pay, I encourage you to take it a step further. Review your overall financial situation, including your budget, to determine in which other areas you can adjust to help you invest more while keeping the same monthly cash flow. You can always count on NFCC certified credit counselors to help you put your finances in order so you can lead a healthy financial life. You can reach them online or by calling 1-800-388-2227.