Many people are rethinking how they manage their finances as the economy continues to change (high interest rates combined with high levels of inflation). One question that will impact long-term financial security is "should I be maxing out my IRA and 401k contributions today?" The answer for most is that you should absolutely be doing this, as we see that many people continue to benefit from tax-advantaged growth when investing (compounding) and making strategic investments. A 401k has a high contribution limit this year which gives you an opportunity to accumulate wealth.
For many people, the biggest benefit of a 401k is the employer match - essentially free money. If you do not contribute enough to get the full employer match, you are leaving a significant amount of your compensation on the table. In addition to the employer match, the money you contribute to your 401k will reduce your tax liability for that tax year (traditional 401k contributions are tax-deferred), meaning you will pay less in taxes for that year. Moreover, the money you contribute to your 401k will grow tax-deferred until you retire. This tax-deferred compounding will help you generate significantly greater wealth for your family over many years, as well as provide significant future tax savings. Even during periods of market volatility, making consistent contributions via payroll deductions will take advantage of dollar-cost averaging because you will buy more shares when prices fall and fewer when prices rise, thereby mitigating fluctuations in your investment returns.
IRAs also provide investment flexibility and tax advantages. When deciding between a Traditional IRA and Roth IRA, you will consider both your income level and your tax situation.
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