How Much to Donate to a 401(k)
Original post by Maggie McCormick of Demand Media
When you sign up for your employer's 401k plan, you must specify how much you want to contribute each paycheck, usually in the form of a percentage of your salary. Naturally, the higher percentage you can afford to put away, the more money you'll have in your retirement years. While there is no one ideal amount of money to donate to a 401k, you can determine an amount that's right for you.
Many employers will add money to your account as part of a matching program. The specifics vary according to the company. For example, a company might match your contributions 50 percent, up to 5 percent of your salary. If your salary was $40,000, the maximum amount that you would get through matching contributions would be $2,000. To get the maximum amount from your company, you'd have to contribute $4,000, or 10 percent of your salary. Consider planning your contribution to get the maximum benefit from your company.
Retirement Investment Mix
The 401k probably isn't your only investment option. Individual retirement accounts also offer tax benefits, but have more flexibility if you need to make an early withdrawal due to financial hardship. At the time of publication, the maximum amount that you could contribute to an IRA is $5,000, or $6,000 if you are over age 50. Once you've determined the total amount of money that you can afford to save for retirement each year, you can split it between the different investment vehicles. For example, if you have $10,000 to save, you might max out your IRAs and then put the leftover $5,000 into your 401k.
Some want to save as much money for retirement as possible. However, the Internal Revenue Service does limit how much money you can set aside tax-deferred for retirement. This amount is $16,500 for those with a traditional or safe harbor 401k plan and $11,500 for a SIMPLE 401k. Those who are over age 50 can contribute an additional $5,500 to any type of 401k plan.
Determining Your Ideal Contribution
The actual amount that you should be saving varies based on your age, current savings, life expectancy, investment risk level and a host of other variables. Ideally, you want to save as much as possible, up to the maximum level set by the IRS. Realistically, though, you may need to save less. Look at your budget to see how much money you have leftover each month and find areas where you could make cuts. Then, ask your employer to automatically transfer this money into your 401k. As you get yearly raises, increase the savings percentage to match the raise -- since you've already been living on the lower amount, you won't miss the money.
- IRS.gov: 401(k) Resource Guide - Plan Participants - Limitation on Elective Deferrals
- CNN Money; How Much Should I Contribute to My 401(k)?; Walter Updegrave; February 2010
- 401kCenter.com: 401(k) Employer Matching Contributions
- CNN Money; Save Early and Often; Penelope Wang; July 2006
- IRS.gov: 2011 IRA Contribution Limits and Deductions
About the Author
Maggie McCormick is a freelance writer. She lived in Japan for three years teaching preschool to young children and currently lives in Honolulu with her family. She received a B.A. in women's studies from Wellesley College.