How Much Should You Contribute to Your 401(K)?

Once you set up your retirement plan at work, the next natural question is: How much should I put in my 401(k)? While there’s no ironclad answer for how much to save in your employer-sponsored plan, there are some important guidelines that can help you set aside the amount that’s right for you: the tax implications, your employer match (if there is one), your own retirement goals, and more.

Here’s what you need to think about when deciding how much to contribute to your 401(k).

How Much Can You Contribute to a 401(K)?

There are several factors to consider when weighing how much to contribute to a 401(k) account, which are detailed in the sections below. The main thing to consider off the bat, however, are the IRS contribution limits themselves.

The IRS may change the retirement contribution limits and other parameters of various retirement accounts from time to time, so it’s always a good idea to double check before you decide how much you want to contribute.

2022 vs 2021 401(K) Contribution Limits

Like most tax-advantaged retirement plans — for example, 403(b)s, 457 plans, different types of IRAs — 401(k) plans come with caps on how much you can contribute. The IRS puts restrictions on the amount that you, the employee, can save in your 401(k); plus, there is a cap on total employee-plus-employer contributions.

For 2021 the contribution limit is $19,500, with an additional $6,500 catch-up provision for those 50 and older, for a total of $26,000. The combined employer-plus-employee contribution limit for 2021 is $58,000 ($64,500 with the catch-up amount).

For 2022, you can save up to $20,500 in your 401(k) — a $1,000 increase. The catch-up amount is unchanged at $6,500, for a total of $27,000 if you’re 50 and up. The employer-employee max is $61,000 for 2022; it’s $67,500 with the catch-up amount.

2022 vs 2021 401(k) Contribution Limits

How Much Should You Put Toward a 401(K)?

Next you may be wondering, OK, those are the limits, but how much should I put in my 401(k)?

One rule-of-thumb is to save at least 10% of your annual income for retirement. So, if you earn $100,000, you’d aim to set aside at least $10,000. But 10% is only a general guideline. In some cases, depending on your income and other factors, 10% may not be enough to get you on track for a secure retirement, and many experts suggest aiming for 15% or even 20% — to make sure your savings will last given the cost of living longer.

In addition, you may want to consider the following:

  • Are you the sole or primary household earner?
  • Are you saving for your retirement alone, or for your spouse’s/partner’s retirement as well?
  • When do you and your spouse/partner want to retire?

If you are the primary earner, and the amount you’re saving is meant to cover retirement for two, that’s a different equation than if you were covering just your own retirement. In this case, you might want to save more than 10%.

However, if you’re not the primary earner and/or your spouse also has a retirement account, setting aside 10% might be adequate. For example, if the two of you are each saving 10%, for a combined 20% of your gross income, that may be sufficient for your retirement needs.

All of this should be considered in light of when you hope to retire, as that deadline would also impact how much you might save as well as how much you might need to spend.

Here are some other factors that should be weighed carefully as you decide how much to save in a 401(k).

Factors That May Impact Your Decision

Before you decide to go with the general rule-of-thumb above, it’s wise to think about taxes, your employer contribution, your own goals, and more.

1. The Tax Effect

The key fact to remember about 401(k) plans is that they are tax-deferred accounts, and they are considered qualified retirement plans under ERISA (Employment Retirement Income Security Act) rules.

That means: The money you set aside is typically deducted from your paycheck pre-tax, and it grows in the account tax free — but you pay taxes on any money you withdraw. (In most cases, you’ll withdraw the money for retirement expenses, but there are some cases where you might have to take an early 401(k) withdrawal. In either case, you’ll owe taxes on those distributions, as they’re called.)

The tax implications are important here because the money you contribute effectively reduces your taxable income for that year, and potentially lowers your tax bill.

Let’s imagine that you’re earning $100,000 per year, and you’re able to save the full $20,500 allowed by the IRS for 2022. Your taxable income would be reduced from $100,000 to $79,500, thus putting you in a lower tax bracket.

2. The Employer Match

Some employers offer a matching contribution, where they “match” part of the amount you’re saving and add that to your 401(k) account. A common employer match might be 50% up to the first 6% you save.

In that scenario, let’s say you save 10% of your $100,000 salary, or $10,000 per year. But your employer might match 50% of the first 6% ($6,000), which comes to $3,000. So the total would be $13,000.

If your employer does offer a match, you likely want to save at least up to the matching amount, so you get the full employer contribution. It’s free money, as they say.

3. Your Retirement Goals

What sort of retirement do you envision for yourself? Even if you’re years away from retirement, it’s a good idea to sit down and imagine what your later years might look like. These retirement dreams and goals can inform the amount you want to save.

Goals may include thoughts of travel, moving to another country, starting your own small business, offering financial help to your family, leaving a legacy, and more.

You may also want to consider health factors, as health costs and the need for long-term care can be a big expense as you age.

4. Do You Have Debt?

It can be hard to prioritize saving if you have debt. You may want to pay off your debt as quickly as possible, then turn your attention toward saving for the future.

The reality is, though, that debt and savings are both priorities and need to be balanced. It’s not ideal to put one above the other, but rather to find ways to keep saving even small amounts as you work to get out of debt.

Then, as you pay down the money you owe — whether from credit cards or student loans or another source — you can take the cash that frees up and add that to your savings.

Consider 401(k) Alternatives Like an IRA

You don’t have to limit your savings to your 401(k). You may also be able to save in other retirement vehicles, like a traditional IRA or Roth IRA.

Can you contribute to 401(k) and IRA plans simultaneously? For example, if you’re already contributing to a 401(k) plan at work, you may be wondering if you can also save money in an IRA.

Or maybe you opened an IRA in college, but now you’re starting your career and have access to a 401(k). Does it make sense to keep making contributions if you’ll soon be enrolled in your employer’s retirement plan?

Contributing to a Traditional IRA and a 401(K)

The short answer is yes, according to the IRS you can contribute to a 401(k) at work and a traditional IRA. But there are limits on the amount of IRA contributions you can deduct in this scenario. You can deduct the full amount of your IRA contributions if:

  • You file single or head of household and your modified adjusted gross income (MAGI) is $68,000 or less.
  • You’re married filing jointly, or a qualifying widow(er), with a MAGI of $109,000 or less.

For incomes over these limits, the amount you can deduct phases out gradually.

Contributing to a Roth IRA and a 401(K)

Can you have a Roth IRA and a 401(k)? You fund a Roth IRA with after-tax dollars, meaning you don’t get the benefit of deducting the amount you contribute from your current year’s taxes. The upside of Roth accounts, though, is that qualified withdrawals in retirement are tax free.

But there’s a catch: Your ability to contribute to a Roth IRA is based on your income. So how much you earn — not necessarily whether you have a 401(k) at work — could be a deciding factor in answering the question, can you have a Roth IRA and 401(k) at the same time.

The rules for combining a 401(k) account with an IRA can be complicated. It’s best to consult a professional.

The Takeaway

Many people wonder: How much should I contribute to my 401(k)? There are a number of factors that will influence your decision. First, there are the contribution limits imposed by the IRS. In 2022, the maximum contribution you can make to your 401(k) is $20,500, plus an additional $6,500 catch-up contribution if you’re 50 and up.

While few people can start their 401(k) journey by saving quite that much, it’s also possible to follow the common guideline and save 10% of your income. From there, you can work up to saving the max. In fact, many plans offer an automatic savings increase that bumps up your savings rate by a small amount, like 1% per year.

In addition, you’ll want to consider whether your employer offers a matching contribution — and at least save that amount, to get the additional funds from your company.

Of course, the main determination of the amount you need to save is what your goals are for the future. This is where you should focus, because saving is never easy. But by contemplating what you want to spend money on now, and the quality of life you’d like when you’re older, you can make trade-offs.

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