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

Most retirement experts recommend you contribute 10% to 15% of your income toward your 401(k) each year. The most you can contribute in 2023 is $22,500 or $30,000 if you are 50 or older (that’s an extra $7,500). That number has only been increased by $500 for the 2024 tax year. It can be hard to know where to save your money in order to best build wealth for retirement. Consider working with a financial advisor to determine a contribution rate or to determine the right savings plan for you.

Understanding How a 401(k) Works

A 401(k) is a retirement savings plan offered by many for-profit companies. They grew in popularity in the 1980s while fewer and fewer companies were offering pensions.

With a 401(k), your employer chooses some investment options, and then it is up to you to create a portfolio. A 401(k) allows you to decrease your taxable income because you fund it with pre-tax dollars, but it’s also riskier because it relies on the market. If the market performs poorly, your 401(k) could potentially lose money. A 401(k) is still a good way to save for retirement, but what percentage of your salary should you actually put into it?

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

As a rule of thumb, experts advise that you save between 10% and 20% of your gross salary toward retirement. That could be in a 401(k) or in another kind of retirement account. No matter where you save it, you want to save as much for retirement as you can while still living comfortably.

It’s important to say that this is just a general rule. The actual amount you should save depends on your situation. For example, if you are 50 years old and don’t have any retirement savings, you should save more than 20% of your gross annual salary. If you’re 30 years old and already have $100,000 in retirement savings, you could probably decrease your contributions for a bit to pay off a mortgage or loan. It’s difficult to create a one-size-fits-all plan because everyone is in a different place with his or her finances.

Saving 10% to 20% of your salary every year might sound like a lot. Luckily, you don’t have to do it all at once. You can spread your contributions out throughout the year and you can contribute more or less some years. You also don’t have to save all that money through your 401(k). Let’s take a step back and talk about other factors you should consider when you think about how much to contribute to your 401(k).

Build Your Emergency Fund

You want to save as much as you can for retirement, but you shouldn’t put all of your savings toward retirement. You should always have enough cash reserves to cover necessary expenses like food and rent. It’s also a good idea to create an emergency fund.

An emergency fund will protect you from unexpected expenses or difficult financial situations. What would you do if you lost your job or didn’t have a regular salary for a month? What if a family member got sick and you had medical bills to pay? A strong emergency fund allows you to get through tough times. Withdrawing money from your retirement accounts should be an absolute last resort. Just as importantly, an emergency fund will ease your mind by providing a sense of security. It’s always nice to know that you have a backup plan in case something goes wrong.

Again, there is no perfect answer for how much you should have in an emergency fund. It depends on your situation. In general, though, you want enough to cover at least a few months of expenses. That may sound like a lot if currently have no emergency fund, but you can build your fund over time by adding a little each week or month.

Contribute Enough for the Full Employer Match

You have enough saved up to cover your expenses. Your emergency fund is there in case you need it. Now you’re starting to think about 401(k) contributions. Where do you start?

The first thing you should figure out is if you have an employer matching program with your 401(k). With an employer match, your employer will match your 401(k) contributions up to a certain percentage of your gross salary. Say your employer offers 100% match on the first 5% you contribute. That means if you contribute 5% of your gross salary to your 401(k), your employer will contribute an amount equal to 5% of your gross salary. The total contribution to your 401(k) would then equal 10% of your gross salary.

An employer match allows you to increase your contribution, and you should always take advantage of matching programs. Unfortunately, many people pass up free money by not contributing up to their employer match.

Invest in IRAs and Roth IRAs

If you remember the rule of thumb earlier, experts advise saving 10% to 20% of your gross salary each year for retirement. You could put this all in your 401(k), but you should consider some other options once you cover your 401(k) match.

If you are single and earn less than $153,000, you qualify for a Roth IRA in 2023. If you are married and earn less than $228,000 in 2023 you qualify for a Roth IRA. Those amounts rise to $161,000 and $240,000 in 2024.

This is a retirement savings vehicle that you can open at virtually any bank or financial institution. You fund these with after-tax dollars. So your contributions won’t reduce your taxable income. However, eligible withdrawals you make after turning 59.5 are tax-free. It’s good to have a mix of taxable and non-taxable income in your retirement.

Roth IRAs are particularly useful for young people who are just starting their careers. Chances are that if you just graduated from college, you’re in a lower tax bracket than you will be in when you retire. Paying the income tax now instead of later can save you money, especially when you need it the most

In 2023, you can contribute up to $6,500 to a Roth IRA. The $1,000 catch-up contribution for those who are at least 50 years old can raise that to $7,500. For the 2024 tax year, those numbers raise to $7,000 and $8,000.

In addition, your employer may offer a Roth 401(k). It takes after-tax money just like a Roth IRA. For 2023, the contribution limit is $22,500. And the catch-up contribution limit for people aged 50 or older is $7,500. The base contribution limit raised to $23,000 in 2024, but the $7,500 contribution extension will stay the same.

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

Contribute as Much as You Can

You have emergency savings. You met your employer’s 401(k) match and then you maxed out a Roth IRA (if you qualify). Then what? How much should you really contribute to your 401(k) now? Your goal at this point should be to save as much as you can for retirement while still living comfortably. For some people, that will mean another 1% of their salary into their 401(k). For others, it will mean maxing out their 401(k).

The key is to put as much as you can toward retirement. Some people spend their money frivolously and save only a little bit. If you’re spending thousands of dollars every month on unnecessary purchases, you should find a way to cut that spending and put it toward retirement instead. (A budget could really help you cut unnecessary spending.) It might not sound fun, but remember that the goal is to have financial security when you retire.

Bottom Line

Experts advise saving 10% to 20% of your gross salary each year, but that’s just a general rule. Your goal should be to save as much for retirement as you can. Before anything else, you should ensure that you have enough savings to cover regular expenses and emergencies. If you have an employer match on your 401(k), you should contribute enough to cover the full match.

If you qualify for a Roth IRA, you should try to max it out. It’ll provide a source of nontaxable income in your retirement. Once you’ve done those things you should contribute as much to your 401(k) or IRA as you can. The most important thing is to contribute regularly – even if you can only save a little bit. It’s hard to prioritize your future over the things you want now, but you will thank yourself if you save while you’re young.

Tips for Contributing to Your 401(k)

If you’re struggling to get started or stay on track, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you switch jobs, you can no longer contribute to a previous employer’s 401(k) plan. You don’t want to lose the hard work you did to save that money, so you should look to make a direct 401(k) rollover to your new employer’s plan.
A traditional IRA and a 401(k) offer similar tax benefits. You might wonder whether one is a better option for you. Here’s an article to help you think about an IRA vs. a 401(k).
You should always avoid early withdrawals from your 401(k). Not only will you have to pay the income tax, you’ll have to a pay 10% penalty. There are a couple of ways you could avoid that big penalty though. If you really think you need to withdraw money early, here’s more information on 401(k) withdrawals.