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What percentage of my salary should I put into my 401(k)?

Answered by
Ben Storey
Director, Retirement Thought Leadership, Bank of America
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 will dictate how much you should personally save, including:
  • How much of your take-home pay you can afford to set aside
  • Your age
  • Whether you think your retirement savings are on track to meet your goals
  • How close you are to retirement
  • Contribution limits — for 2021, the IRS permits a maximum pre-tax or Roth employee contribution of $19,500, with an additional $6,500 catch-up contribution for individuals age 50 or older at any time during the year.
Increasing your 401(k) contri­butions can add up
Over time, even a seemingly small percentage increase in your savings rate can make a big dif­ference.
Total amount accumulated over 30 years, based on a hypothetical annual salary of $75,000.
A number of people have benefited 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. In 2021, if you're under age 50, you can contribute up to $19,500; those age 50 or older by the end of the year can contribute up to $26,000 for 2021 ($19,500 plus an additional $6,500 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. The combined employee-employer contribution limit for 2021 for defined contribution plans is $58,000, or $64,500 for individuals eligible for catch-up contributions (if plans permit). To find out more, read Merrill's Contribution Limits and Tax Reference 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 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.

Consider Roth 401(k) contributions

Matching contributions are essentially free money, and you may want to take advantage of them while you can. 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 Thought Leadership, 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. 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.
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Footnote 1 Any earnings on Roth 401(k) contributions can generally be withdrawn tax-free if you meet the two requirements for a "qualified distribution": 1) At least five years must have elapsed from the first day of the year of your initial contribution, and 2) You must have reached age 59½ or become disabled or deceased. If you take a nonqualified withdrawal of your Roth 401(k) contributions, any Roth 401(k) investment returns are subject to regular income taxes, plus a possible 10% additional federal tax if withdrawn before age 59½, unless an exception applies. State income tax laws vary; consult a tax professional to determine how your state treats Roth 401(k) distributions.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
You have choices about what to do with your employer-sponsored retirement plan accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over an employer-sponsored plan from your old job to your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and different types of protection from creditors and legal judgments. These are complex choices and should be considered with care. For more information on rolling over your IRA, 401(k), 403(b) or SEP IRA, visit our rollover page or call a Merrill rollover specialist at 888.637.3343.
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