How Much Should I Contribute to my 401(k)?

You should contribute at least 10% of your income to your 401(k).

Written by Rae Hartley Beck / July 18, 2022

Quick Bites

  • A 401(k) is a type of retirement account that allows you to save for retirement in a tax-advantaged way.
  • You should contribute a total of at least 10% of your income to your 401(k).
  • If you’re starting later in life or expect to have years of no contributions, you should contribute 15-20%

A 401(k) may sound like a particularly grueling sort of long distance race, which it kind of is, minus the grueling. A 401(k) is a type of retirement account that allows you to put away a portion of your income now to save it for your later years. Curious as to how much you should contribute? We’ll break it down here.

What’s a 401(k)?

A 401(k) is a retirement plan offered through employers that allows workers to put a percentage or set amount of their paycheck into a retirement account to provide income in their later years.

There are two types of 401(k)s offered through most employers, a traditional 401(k) and a Roth 401(k). A traditional 401(k) uses pre-tax dollars, meaning that you pay less in taxes the year you put money into it, but will have to pay taxes on what you put in and any investment gains when you take it out in retirement. A Roth 401(k) functions the opposite way. You pay the taxes for your contributions this year, but your money grows tax free.[1]

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Inside this article

  1. How much should I contribute?
  2. Percentage to contribute
  3. Contribution limits
  4. What about matching?
  5. What if I start later in life?
  6. Alternatives
  7. What about tax implications?

How much should I contribute to my 401(k)?

How much you should contribute to your 401(k) depends on your age and your financial situation. You want to make sure that you’ll have enough in retirement to live a comfortable life, but you also want to make sure you have enough to live a comfortable life now. The earlier you start saving, the less you’ll need to save every month.

Amount desired in 401(k) at retirement $500,000 $1,000,000 $1,500,000
Monthly contribution starting at 25 $79.05$158.12 $237.18
Monthly contribution starting at 35$221.18$442.37$663.56
Monthly contribution starting at 45 $658.43$1316.87$1975.32

*Assumes retirement age of 65 with 10% annual rate of return compounded monthly.

What percentage should I contribute to my 401(k)?

Most experts agree that you should aim to contribute a minimum of 10% of your salary including any matching. For anyone starting later in life 15-20% is advised. People who expect to take years off to pursue education, parenthood, or entrepreneurship should increase their contributions while working to cover non-working years. Giving up an income to raise a child is a lot easier if you have a big nest egg and were already saving a large portion of your salary.[2]

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Contribution limits

The 2022 contribution limits for individuals under 50 is $20,500. For individuals 50 and over the limit is $26,000. Employers may contribute up to a combined limit of $61,000 for employer + employee contributions.[3]

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What about matching?

Many of the best 401(k) plans offer a match on any contributions you make. If you’re unsure if your employer offers a match, speak to your benefits specialist. A typical match is either 100% or 50% of your contribution up to a certain percentage.

For example Jane works for an employer who will match 100% of her contribution up to 5%. For Jane to hit the recommended 10% total 401(k) contribution, she’ll need to contribute at least 5%. Juan works for an employer who will match 50% of his contribution up to 6%. For Juan to take full advantage of his employer’s match he’ll have to contribute 6%, and to hit the recommended 10% total 401(k) contribution he’ll need to contribute 7%.

Contributing at least enough to get the match is a “100% return on your money when contributing the minimum contribution needed for the employer match.” says Thanasi Panagiotakopoulos, Certified Financial Planner and owner of Life Managed in Phoenix, Ariz.

What if I start later in life?

Starting later in life means you have compound interest working less in your favor. It’s better to start investing when you’re young, and you’ll never be younger than you are right now. Don’t dwell on what you didn’t do before, focus on starting to save as much as you comfortably can for retirement now.

What are other alternatives I should consider?

Beyond a 401(k), a Roth or traditional Individual Retirement Account (IRA), and a Health Savings Account (HSA), are all accounts that should be considered for retirement. A Roth IRA is the most flexible retirement account. It goes tax free to your heirs, making it a great form of life insurance, and it even allows you to withdraw your own contributions at any time for any reason. A Health Savings Account allows you to contribute tax-free money, which grows tax-free and is withdrawn tax-free for eligible health expenses.

Make sure that you’re putting enough into your 401(k) to at least get the match, and then take a look at some other options to see what’s best for your situation.

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What about tax implications?

“Individuals who only saved in a traditional 401(k) will become victims of their own success when they realize all of their retirement income is subject to ordinary income tax,” says Panagiotakopoulos.

Having a mix of pre-tax accounts like a traditional 401(k) and post-tax accounts like an HSA, Roth IRA or Roth 401(k) can allow you to manage your income in retirement to be as tax efficient as possible.

What are criticisms of a 401(k)?

401(k)s are not available to everyone. You have to work for an employer that offers them and you have to be a qualifying employee. Millions of American workers do not have access to a 401(k) and many advocates argue for shifting to an expanded Individual Retirement Account (IRA) system. [4]

Should I contribute to a traditional 401(k) or a Roth 401(k)?

That depends entirely on how much you pay in taxes now and how much you think you’ll pay in taxes later. If you think you’ll want more money in retirement, living the fabulous life of family Disney vacations and a cruise every month, you may be better off contributing to a Roth 401(k). If you currently have a higher income than you’ll need or want in retirement after your house is paid off and your kids are out of college, then a traditional 401(k) could be a superior choice.

Can you have a 401(k) if you’re self employed?

Yes, you can have a 401(k) if you’re self employed and have no employees. This is referred to as a Solo 401(k), Solo-k, Uni-k, or one-participant-k. An alternative to a Solo 401(k) is a SIMPLE IRA. Keep in mind that these accounts take longer to open with more documentation required than a personal IRA so give yourself plenty of time to open them before the end of the year![5]

Article Sources
  1. “Traditional and Roth 401(k) Plans.” U.S. Securities and Exchange Commission. https://www.investor.gov/additional-resources/retirement-toolkit/employer-sponsored-plans/traditional-and-roth-401k-plans
  2. “The New Math of Saving for retirement may boil down to this one, absurdly simple rule.” Brookings Institute. June 5, 2019. https://www.brookings.edu/opinions/the-new-math-of-saving-for-retirement-may-boil-down-to-this-one-absurdly-simple-rule/
  3. “Retirement Topics- 401(k) and Profit-Sharing Plan Contribution Limits.” Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
  4. “Retiring the 401(k): A New Framework for Retirement Savings.” Yale Law & Policy Review. June 14, 2021. https://ylpr.yale.edu/inter_alia/retiring-401k-new-framework-retirement-savings
  5. “One-Participant 401(k) Plans.” Internal Revenue Service. https://www.irs.gov/retirement-plans/one-participant-401k-plans

About the Author

Rae Hartley Beck

Rae Hartley Beck

Rae got her start writing in finance with a column for her college newspaper. Her work has since appeared on Investopedia, Bankrate and other financial news outlets. Rae worked for the Social Security Administration from 2016 to 2022 starting as a jack-of-all trades, and finishing her career as a claims specialist.

Full bio

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