How Can I Make My 401(k) Grow Faster?

A 401(k) plan offers a structured way to save for retirement, providing tax advantages. It is an employer-sponsored retirement account that allows employees to contribute a portion of their salary, often with an employer match. Maximizing its growth is important for building a nest egg. This involves consistent contributions, strategic investment choices, and careful management of associated costs.

Maximizing Your Contributions

Increasing your regular 401(k) contributions accelerates its growth. Many employers offer a matching contribution, adding funds based on your contributions up to a certain salary percentage. This match is free money and should be prioritized. For example, if your employer matches 50% of contributions up to 6% of your salary, contributing at least 6% means you receive an additional 3% of your salary into your retirement account.

Beyond securing the employer match, consider increasing your contribution percentage incrementally, perhaps with each salary increase. For 2025, employees can contribute up to $23,500. Those aged 50 and over can make additional “catch-up” contributions. In 2025, individuals aged 50 to 64 and older can contribute an extra $7,500, bringing their total employee contribution limit to $31,000. A higher catch-up contribution of $11,250 is available for those aged 60 to 63, allowing them to contribute up to $34,750.

When contributing, you typically choose between a traditional pre-tax 401(k) or a Roth 401(k). Traditional 401(k) contributions are made with pre-tax dollars, reducing your current taxable income, and earnings grow tax-deferred until withdrawal. A Roth 401(k) receives after-tax contributions, but qualified withdrawals in retirement are entirely tax-free. Both options allow contributions up to the annual maximums, with the choice depending on your current and anticipated future tax situation.

Optimizing Your Investments

Your 401(k)’s growth depends on how the money is invested. Asset allocation, distributing investments among different asset classes like stocks and bonds, is a key strategy. This allocation should align with your risk tolerance and time until retirement. Younger investors with a longer time horizon may allocate more to stocks for growth, while those closer to retirement might shift towards bonds for stability.

Diversification spreads investments across various asset classes, industries, and geographic regions. This approach helps mitigate risk by reducing the impact of poor performance in any single investment. Rebalancing your portfolio periodically maintains your desired asset allocation as market values fluctuate. This involves selling investments that have grown and buying more of those that have lagged, bringing your portfolio back to its target percentages.

Most 401(k) plans offer a selection of mutual funds. Common choices include target-date funds, which automatically adjust their asset allocation to become more conservative as you approach retirement. Index funds, designed to track a specific market index like the S&P 500, are often available and have lower operating expenses than actively managed funds. Actively managed funds aim to outperform the market through a fund manager’s expertise, but their higher management fees can offset potential gains.

Understanding and Reducing Fees

Fees can erode your 401(k)’s growth over time, even small percentages. Common 401(k) fees include administrative fees for plan services and investment management fees, often expressed as an expense ratio. Trading fees may also apply. For example, a 0.5% annual fee on a $100,000 balance over 35 years could result in a difference of over $150,000 in your final retirement savings compared to a scenario with no fees.

Information about your plan’s fees can be found in annual disclosures, plan administrator statements, or fund prospectuses. On average, 401(k) plan fees can range from 0.5% to over 2% of plan assets annually. Many equity mutual funds in 401(k)s have expense ratios of 1% or less.

To minimize fees, select lower-cost investment options within your plan, such as index funds, which have lower expense ratios than actively managed funds. A good expense ratio for a 401(k) fund is under 0.50%. Being mindful of unnecessary trading activity can also help reduce trading fees.

Managing Past 401(k) Accounts

When you leave an employer, you have several options for managing your previous 401(k) account. One choice is to leave the account with your former employer, provided the plan allows it and you are comfortable with its investment options and fee structure. Another common option is to roll the funds into your new employer’s 401(k) plan, which can simplify your retirement savings by consolidating accounts.

A third strategy is to roll over your old 401(k) into an Individual Retirement Account (IRA). This approach provides greater control over your investments, offering a broader selection of options and potentially lower fees than some employer-sponsored plans. Consolidating funds into an IRA also simplifies managing your retirement savings.

Cashing out your 401(k) should be avoided. If you withdraw funds before age 59½, you will owe ordinary income taxes on the distribution, plus a 10% early withdrawal penalty. For example, a $25,000 early withdrawal could result in thousands of dollars in taxes and penalties, hindering your retirement savings. Receiving a distribution check directly means your plan administrator will withhold 20% for federal taxes. You must deposit the full amount (including the withheld portion) into an IRA within 60 days to avoid tax consequences. Consider fees, investment options, and your personal financial situation when deciding the best path for your old 401(k) accounts.