How Much Should You Contribute to 401(k), Explained!!!

How much should you contribute to 401(k)
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If your new employer offers a 401(k) plan, you’ll need to decide how much of your monthly salary to contribute when you sign up for it. This seemingly insignificant decision will have far-reaching effects on your income tax withholding, annual tax bill, and savings for retirement.

Well, on one hand, the maximum 401(k) contribution for 2023 is $22,500, or $30,000 if you are 50 or older (an extra $7,500); and on the other, most retirement experts recommend putting away 10% to 15% of your income each year. But here are a couple of other things to think about when calculating how much to contribute to your 401(k) in 2023:

  • The quickest way to save money for retirement is to become eligible for a 401(k) match.
  • It would be best if you gradually increased your savings rate.
  • Your investments will have more time to grow if you start saving at a young age.
  • Funding your 401(k) up to the maximum allowed allows you to save on taxes now.

Before we go any further, you can check out the following articles to help you understand what 401k is and how it works generally.

Understanding 401(k) Plans

Many for-profit companies offer 401(k) retirement savings plans. They gained popularity in the 1980s as fewer and fewer companies offered pensions.

Your employer selects some investment options for a 401(k), and it is up to you to build a portfolio. A 401(k) allows you to reduce your taxable income because it is funded with pre-tax dollars but also riskier because it is market-based. Your 401(k) could lose money if the market performs poorly.

A 401(k) is still a good way to save for retirement, but how much of your income should you contribute into it?

Limits on 401(k) Contributions

When starting to save for retirement through employer contribution plans, it’s critical to understand the Internal Revenue Service’s (IRS) annual contribution limits. Employees who participate in a 401(k) plan have an elective deferral (contribution) limit of $22,500 in 2023 ($20,500 in 2022).

You can also make additional catch-up contributions if you are over the age of 50. If you are 50 or older in 2023, you can contribute $7,500 ($6,500 in 2022).

Contribution limits also apply to 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plan: $20,500 for tax year 2022, and $22,500 for tax year 2023, plus catch-up contributions for those who qualify.

401(k) Employer Match

The amount you contribute to your 401(k) will be determined by your personal retirement goals, existing resources, lifestyle, and family decisions. However, setting aside at least 10% of your gross earnings is a good starting point.

In any case, if your employer provides a 401(k) matching contribution, you should contribute enough to receive the maximum amount. A typical match is 3% of your salary or 50% of the first 6% of employee contributions.

“There is no ideal contribution to a 401(k) plan unless there is a company match. You should always take full advantage of a company match because it is essentially free money that the company gives you,” says Arie Korving, a financial advisor with Koving & Company in Suffolk, VA.

Another way to think of an employer match is as compensation provided as a perk of your job, similar to health insurance or vacation days. You will lose some of your compensation if you do not take advantage of it. Check to see if your plan has a match and contribute enough to get the full amount. You can always increase or decrease your contribution later.

To get the full match, many plans require a 6% deferral, and many savers stop there. That may be sufficient for those who anticipate having additional resources. Most people, however, are unlikely to be so.

If you start early enough, given the time your money has to grow, a 10% contribution can add up to a very nice nest egg as it compounds over time, especially if your salary rises throughout your career.

What Should Your 401(k) Contribution Be?

As earlier mentioned, experts recommend that you save between 10% and 20% of your gross salary toward retirement. This could be in the form of a 401(k) or another type of retirement account. You want to save as much money for retirement as possible while still living comfortably.

It is essential to note that this is only a general rule. Your unique circumstances determine the actual amount you should save. If you are 50 years old and have no retirement savings, you should save more than 20% of your gross annual salary. If you’re 30 and already have $100,000 in retirement savings, you could probably reduce your contributions to pay off a mortgage or loan for a while. It’s challenging to create a one-size-fits-all plan because everyone’s financial situation is unique.

Saving 10% to 20% of your annual salary may appear to be a lot. Fortunately, you don’t have to do everything all at once. You can make contributions throughout the year and contribute more or less in some years. You also don’t have to put all of that money into your 401(k). Let’s take a step back and discuss other factors to consider when deciding how much to contribute to your 401(k).

#1. Create an Emergency Fund

You want to save as much as possible for retirement, but you shouldn’t put all of your money into it. You should always keep enough cash on hand to cover necessary expenses such as food and rent. Making an emergency fund is also a good idea.

Unexpected expenses or difficult financial situations will be protected by an emergency fund. What would you do if you lost your job or didn’t get paid for a month? What if a family member became ill and you needed to pay medical bills? A good emergency fund will help you get through difficult times. Withdrawing funds from your retirement accounts should only be done as a last resort. Equally important, an emergency fund will give you peace of mind by providing a sense of security. It’s always good to have a back-up plan in case something goes wrong.

Again, there is no perfect answer to the question of how much you should have in an emergency fund. It is dependent on your circumstances. You should have enough to last at least a few months. That may seem like a lot if you don’t have an emergency fund yet, but you can build one over time by contributing a little each week or month.

#2. Make a Contribution to the Employer Match

You have enough money set aside to cover your expenses. You have an emergency fund in case you need it. You’re starting to consider 401(k) contributions. Where do you begin?

First, you should check whether your company has a 401(k) matching program. Your employer will match your 401(k) contributions up to a certain percentage of your gross salary with an employer match. Assume your employer matches your first 5% contribution. This means that if you contribute 5% of your gross salary to your 401(k), your employer will also contribute 5% of your gross salary. The total 401(k) contribution would then be 10% of your gross salary.

Employer matching allows you to increase your contribution, and matching programs should always be used. Unfortunately, many people miss out on free money by not maxing out their employer match.

#3. Put money into IRAs and Roth IRAs.

If you recall from earlier, experts recommend saving 10% to 20% of your gross salary each year for retirement. You could put it all in your 401(k), but once you’ve exhausted your 401(k) match, you should think about other options.

In 2023, if you are single and earn less than $153,000, you are eligible for a Roth IRA. A Roth IRA is available if you are married and earn less than $228,000 in 2023.

This is a retirement savings account that can be opened at almost any bank or financial institution. These are paid for with after-tax dollars. As a result, your contributions will not reduce your taxable income. However, eligible withdrawals made after the age of 59.5 are tax-free. It is beneficial to have a mix of taxable and non-taxable income in retirement.

Roth IRAs are especially beneficial for young people who are just starting out in their careers. If you just graduated from college, you are probably in a lower tax bracket than you will be when you retire. Paying your income tax now rather than later can help you save money, especially when you need it the most.

In 2023, you can contribute up to $6,500 to a Roth IRA and a $1,000 catch-up contribution if you are at least 50.

Furthermore, your employer may provide a Roth 401(k). It accepts after-tax funds, just like a Roth IRA, and the contribution limit for 2023 is $22,500. In addition, the catch-up contribution limit for people over 50, as earlier mentioned, is $7,500.

You can also invest in a traditional IRA, which, like a 401(k), takes pre-tax dollars and reduces your taxable income. Some people have an IRA because when they left a previous employer, they rolled over their 401(k) funds into an IRA.

#4. Contribute as Much as You Can

You have an emergency fund. You took advantage of your employer’s 401(k) match and then maxed out your Roth IRA (if you qualify). What happens next? How much should you really put into your 401(k) right now?

At this point, your goal should be to save as much as possible for retirement while still living comfortably now. For some, this will imply contributing an additional 1% of their salary to their 401(k). Others will have to max out their 401(k).

The key is to save as much as possible for retirement. Some people waste their money and only save a small amount. If you’re spending thousands of dollars each month on unnecessary purchases, you should find a way to reduce that spending and redirect it toward retirement. (A budget can help you cut unnecessary spending.) It may not sound fun, but keep in mind that the goal is to have financial security when you retire.

What if You Are Unable to Meet Your Employer’s Match?

If you aren’t yet able to contribute enough to meet your employer’s match and thus not enough to achieve the desired 15% savings rate, aim to increase your retirement contributions by 1% to 2% per year. Some companies will automatically raise your contribution rate if you opt-in, so make sure you’re signed up for what’s known as a “auto-escalation” feature.

Ivory Johnson, CFP and founder of Delancey Wealth Management, suggests increasing your contribution rate as your pay increases until you reach your contribution limit. The amount you can contribute to your 401(k) each year is limited. In 2021, the standard annual contribution limit for 401(k) plans is $19,500. Those over 50 can also use catch-up contributions to add an additional $6,500 to their 401(k) account. Employer contributions are not counted toward those limits.

Meanwhile, keep in mind that, while you do not pay income taxes on money saved in a 401(k), you will have to pay taxes when you withdraw the funds during your nonworking years.

How Much Should You Put Into a 401(k) If You’re Close to Retirement?

If you begin saving later in life, particularly in your 50s, you may need to increase your contribution amount to compensate for lost time.

Fortunately, late savers are typically in their prime earning years. They also have a better chance of saving once they reach the age of 50. As previously stated, the 2023 catch-up contribution limit is $7,500 for individuals who are 50 or older on any day of the calendar year.

For example, if you turn 50 on or before December 31, 2022, you can contribute an additional $7,500 above the $22,500 401(k) contribution limit for the year, for a total of $30,000, including catch-ups.

401(k)s vs. Bills vs. Emergency Fund

It can be overwhelming to save for retirement while building an emergency fund and staying on top of your bills. Depending on your income and living expenses, you may be unable to save the full 10% in your 401(k).

Begin by calculating your mandatory expenses to determine how much to allocate to bills, emergency savings, and your 401(k). These include things like your rent, utilities, childcare, and medications. Subtract your monthly income from your mandatory monthly expenses (averaging variable costs like groceries if necessary). Your 401(k) contributions and emergency savings will be deducted from your discretionary funds.

Check out what’s left. Even if you can’t afford to contribute the full 10% of your salary to a 401(k), you should try to contribute enough to qualify for any employer match. This will double the amount you contribute to your 401(k) each month at no additional cost to you.

Remember that something is better than nothing when it comes to emergency savings. Your ultimate goal should be to have enough money saved to cover your necessary expenses for several months. However, you are not required to arrive immediately. If you save $50 per month, you’ll have saved $600 by the end of the year. You will have $1200 if you save $100 per month. If possible, automate your emergency savings so you aren’t tempted to spend it.

If you have high-interest debt, such as credit card debt, you may need to pay it off first before working on your emergency savings. Even if you put your emergency fund in a high-yield savings account, the interest you earn will not be greater than the interest you will be charged on your debt. Pay off your debts as soon as possible, then return your attention to building your emergency savings.

After you’ve allocated your income to these various goals, you can divide the remainder of your income among other discretionary expenses. As your income increases or your debt is paid off, you can put more money into your 401(k) and emergency savings.

401(k) Savings Rates by Age

Your income and life circumstances will determine how much you can save in a 401(k). However, having some benchmarks to aim for can be beneficial when attempting to save effectively for retirement.

Investment firms like Fidelity frequently recommend an every-ten-years model, in which you aim to save a specific number of years of income every ten years. As an example:

  • By 30, you should have saved your annual salary.
  • By 40, you should have saved three times your annual salary.
  • By 50, you should have saved six times your annual salary.
  • By 60, you should have saved eight times your annual salary.
  • By 67, you should have saved ten times your annual salary.

These figures include not only your 401(k) but all of your retirement savings, including other accounts such as a Roth IRA. However, these figures also assume that you started investing early enough to benefit from compound interest and that you have other savings available in wealth-generating accounts such as stocks or mutual funds.

Your personal savings goals may also differ depending on when you plan to retire, whether your job provides a pension, whether you have health issues, and what you want your retirement lifestyle to be like.

These benchmarks can be useful, but they should not be used as a strict guide because they do not consider your individual needs and goals. Instead, consult a financial planner to develop a plan tailored to your needs. Many banks and Employee Assistance Programs provide financial counseling services to help you plan your retirement savings.

Tips for Making 401(k) Contributions

  • Consider working with a financial advisor if you’re having trouble getting started or staying on track.
  • You can no longer contribute to a previous employer’s 401(k) plan if you change jobs. You don’t want to risk losing the money you worked so hard to save, so consider a direct 401(k) rollover to your new employer’s plan.
  • A traditional IRA and a 401(k) provide similar tax advantages. You may be wondering which is the better option for you. Here’s an article to help you decide between an IRA and a 401(k).
  • Early withdrawals from your 401(k) should be avoided at all costs. Not only must you pay income tax, but you must also pay a 10% penalty. However, there are a few options for avoiding the severe penalty. If you really need to withdraw money from your 401(k), here’s more information on 401(k) withdrawals.

What Percentage of My Paycheck Should I Contribute to My 401(k)?

You should aim to contribute enough from each paycheck to qualify for any employer match. Contribute at least 3% of each paycheck to your 401(k) if your employer matches your contributions. Once you’ve met the match, increase your contributions as you can, aiming for 10-20% of your monthly salary.

How Much Should I Put Into My 401(k) in my Twenties?

Money contributed to a 401(k) in your 20s has the longest time to grow and earn compound interest, so contribute as much as you can during this decade. If possible, aim for 15%. Put in whatever you can if you can’t afford 15%. Then, as your income grows, try to increase your contributions by 1% each year.

What Should I Have Saved for Retirement?

How much you should have saved will be determined by factors such as your retirement age, health, and desired retirement lifestyle. If you have $1 million saved in accounts that earn 5% interest when you retire, you could have an annual income of around $50,000 during retirement.


Experts recommend saving 10% to 20% of your annual gross salary, but this is only a guideline. Your goal should be to save as much money as possible for retirement. Before you do anything else, make sure you have enough money in savings to cover regular expenses and emergencies. If your employer offers a 401(k) match, you should contribute enough to cover the full match. You should try to max out your Roth IRA if you qualify. It will provide you with nontaxable income in retirement. After you’ve completed those steps, you should contribute as much as you can to your 401(k) or IRA.

The most important thing is to contribute on a regular basis, even if you can only save a small amount. It’s difficult to prioritize your future over what you want now, but you’ll be glad you did if you save while you’re young.


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