There's no hard and fast rule for how much of your salary you should put into your 401(k). But, in general, you should always consider contributing as much as possible, depending on your specific financial circumstances.
A combination of factors will dictate how much you should personally save, including:
"A number of people have benefited from saving and investing as much money as possible in a 401(k) account, within certain limits," says Bill Hunter, director of Personal Retirement Strategies and Solutions at Bank of America Merrill Lynch.
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. In 2018, if you're under age 50, you can contribute up to $18,500 per year; those age 50 or older can contribute up to $24,500 per year, as long as your employer's plan permits catch-up contributions. These limits, by the way, do not include any contribution match that your employer might provide. The combined employee-employer contribution limit for 2018 is $55,000, or $61,000 for individuals eligible for catch-up contributions (if plans permit).
Take advantage of company matching
If you are fortunate enough to find that your employer offers to match your 401(k) contributions, consider contributing at least as much as the percentage your company 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 benefit. "Matching contributions are essentially free money," says Hunter, "and you may want to take advantage of them while you can." Putting that money into a Roth 401(k) may be a good option if your employer offers it. Qualified withdrawalsFootnote 1 from a Roth 401(k) 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."
— Bill Hunter, director of Personal Retirement Strategies and Solutions at Bank of America Merrill Lynch
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. In that case, your withdrawal will be taxed as ordinary income and may be subject to a 10% additional federal tax, unless an exception applies.