There's no hard-and-fast rule for how much of your salary you should put into your 401(k) account. But, in general, you should always consider contributing as much as possible, depending on your specific financial circumstances.
A combination of factors typically dictates how much you should personally consider contributing to your 401(k) plan account, including:
Increasing your 401(k) contributions can add up
Over time, even a seemingly small percentage increase in your contributions can make a big difference.
Total amount accumulated over 30 years, based on a hypothetical annual salary of $75,000.
Source: AARP 401(k) Savings & Planning Calculator
Footnote: Dollar figures are rounded to the nearest hundred. This hypothetical illustration assumes an annual salary of $75,000, pre-tax contribution rates of 6% and 10% with contributions made at the beginning of the month and a 6% annual effective rate of return. Hypothetical results are for illustrative purposes only and are not meant to reflect an actual investment, nor does it account for the effects of taxes, or investment expenses or withdrawals. Returns are not guaranteed and results will vary. Investment returns cannot be predicted and will fluctuate. Investor results may be more or less. It is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Withdrawals prior to age 59½ also may be subject to a 10% additional federal tax, unless an exception applies.
There's the potential to benefit from saving and investing as much money as possible in a 401(k) account, within certain limits.
Know your maximum contribution limit
Start by understanding how much you're allowed to contribute and work back from there. Your maximum contribution limit depends on how old you are. These limits change annually. In addition, your age plays a factor. Those age 50 and older by the end of the calendar year can contribute an additional amount in catch-up contributions, as long as your employer's plan permits catch-up contributions. These limits, by the way, do not include any contributions your employer might provide. To learn more, refer to the
Annual Limits Guide (PDF).
Take advantage of company matching
If you are fortunate enough to have an employer that offers to match your 401(k) contributions, consider contributing at least as much as the percentage your employer will match. Say your employer will match up to 6% of your salary — then aim to contribute at least that much, if you can, to take full advantage of the employer match benefit. Matching contributions are essentially free money, and you may want to take advantage of them while you can.
Consider Roth 401(k) contributions
Making your contributions as Roth contributions that are held in a Roth 401(k) account may be a good option if your employer offers it. Qualified distributionsFootnote 1 from a Roth 401(k) account are federal income tax-free, which can help to reduce your tax burden in retirement.
"Matching contributions are essentially free money, and you may want to take advantage of them while you can."
— Ben Storey, director, Retirement Research & Insight, Bank of America
Create an emergency fund so you won't have to tap your 401(k) account early
Before maxing out your contributions, make sure you have money set aside in an emergency fund — three- to six- months' worth of living expenses is generally considered enough — as well as whatever you need to cover short-term goals like paying off debt and loans. You don't want to be caught in a situation where you're forced to withdraw funds from your 401(k) account before age 59½.Footnote 2 In that case, your withdrawal generally will be taxed as ordinary income and may be subject to a 10% additional federal tax, unless an exception applies.Footnote 3 A tax advisor can help you determine whether the additional tax applies to your situation.