How Much should You Put Into Your 401(k)?

Navigating your way toward financial security in retirement isn’t exactly a simple task and requires careful consideration when deciding how, when, and where to invest your money in order to maximize returns.

Trying to choose from a seemingly limitless sea of investment options can be frustrating, but if you’ve found yourself with a job that offers you a 401(k) as part of your benefits package—or even better, one which also includes employer matching—you’re in luck.

A 401(k) is essentially a long-term savings plan that substitutes for a traditional pension, and even though your returns are ultimately based on the performance of fluctuating financial markets, 401(k)s are still widely considered to be a smart addition to any retirement portfolio. Now, you just need to decide how much you should contribute. The information below should help you make a more educated decision when planning for your retirement.

How much can you put into your 401(k)?

As of 2019, the maximum annual amount you as an employee are allowed to contribute to your 401(k) is $19,000, and $25,000 for those 50 and older thanks to an additional allowance of $6,000 in catch-up contributions. In 2020, the annual elective deferral limit, including catch-up contributions, will increase to $19,500 and $26,000 respectively.

It’s important to note that any non-elective contributions, employer matching, and/or allocations of forfeitures will not count towards your elective deferral limit. So, given the overall annual contribution limits set by the IRS, you could theoretically increase your total 401(k) investment by up to $56,000 or $62,000 this year depending upon your age.

Contributions to 401(k)s with employer matching

Any amount of matching contributions from your employer essentially equates to free money for you, and you should take full advantage by contributing at least enough to cover their commitment.

For example, if you make $100,000 per year and your employer will match 100% of your contributions on up to 5% of your total salary, you should make an elective deferral of at least $5,000 to your 401(k). Anything less, and you’ll be missing out on a wonderful opportunity to exponentially increase your retirement income.

Contributions to 401(k)s without employer matching

Knowing how much to contribute to a 401(k) without any matching contributions from your employer is a little more difficult to discern and relies heavily on several influencing factors.

Is the annual return rate better than that of other retirement accounts such as an IRA or Roth IRA? Would you benefit more from paying taxes on the money now or later? Are the fees associated with your 401(k) less than those of other individual retirement accounts?

As a general rule of thumb, you should save between 10 and 15 percent of your income for retirement. If, after answering all the questions above, there still isn’t a clear choice, consider starting with a Roth IRA.

Any contributions to a Roth IRA are made after-tax and therefore each dollar is worth more than that of a traditional 401(k) in retirement. Once you’ve maxed out your contributions to your Roth IRA, start making elective deferrals to your 401(k) until you’ve set aside the recommended savings percentage or the amount you’ll need to meet your financial goals for the future. This provides a solid mixture of taxable and tax-free income once you retire.

Regardless of how much you decide to contribute to your 401(k), giving careful consideration to all of your options—and the current and future benefits of each—is essential to financial security in retirement. Spend time making all the necessary calculations—for example, lowering your tax bracket today by contributing to a 401(k) could be worth a lot more than an extra 1,000 tax-free dollars in the future. Whatever choices you make, as long as you’re saving, you’re headed in the right direction.

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