How Much Should I Put in My 401(k) Plan?

woman putting money in jar with 401K label
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In general, contributing to your 401(k) plan is a good idea, but there are times where it may not be so good, and there are times where it may make sense to contribute more or less to your 401(k) plan.

Only Contribute to your 401(k) Plan If…

In most cases, you should only contribute to your 401(k) plan if you have a savings account already that can serve as an emergency fund, and if you have adequate insurance coverage in place, such as the appropriate health insurance, property/casualty, and life insurance. You may also want to pay down debt with high-interest rates before getting aggressive with your retirement savings. Always contribute some but consider putting the excess toward revolving debt.


401(k) plans are designed to provide incentives for you to save for retirement and designed so they are not such an appealing savings vehicle if you need money earlier than retirement. If you lose your job or change jobs, or a health problem arises, in many cases you cannot access your 401(k) money at all, and if you can, the taxes and penalties can be hefty. Your 401(k) contributions are for retirement, not for emergencies, a new car, or anything else. Once you have an adequate savings account, use additional criteria below to figure out how much to contribute to your 401(k) plan.

Be Sure to Get All Your Company Match Amount

Find out if your company provides any form of matching contributions to your 401(k) plan. For example, if you contribute 3% of your income to your 401(k) plan, they may match these contributions $1 for $1. This provides you an instant 100% return on any 401(k) contributions you make. Many companies will match your contributions up to a certain percentage of your income. Some companies will make contributions to your 401(k) plan in the form of profit sharing or non-elective contributions regardless of whether you contribute or not.

Company matching contributions to your account are often subject to a 401(k) vesting schedule which is a schedule that tells you how much of the money the company put in your account you get to keep if/when you are no longer employed by them.

Certain types of contributions, such as something called a “safe harbor match” are always 100% vested, meaning the money is yours even if you terminate employment immediately after they deposit it. Other types of contributions, such as profit sharing contributions, may have a more restrictive vesting schedule which requires you to be employed five years or longer before you get to keep 100% of the money the company contributes on your behalf.

If you don’t plan on working for your employer for very long, and if the company contributions are subject to a lengthy vesting schedule, then matching contributions should not be much of a determining factor when deciding how much to contribute to your 401(k) plan.

If your company matches contributions, the contributions are subject to a short vesting schedule and/or you plan on working there for a while, consider contributing enough to receive the full amount of the company match each year.

Consider Taxes When Determining What Type of Contribution to Make

Traditional 401(k) plans allow you to make pre-tax contributions. Some plans allow you to make after-tax contributions and many plans are beginning to allow you to make Roth contributions. Each type of contribution has its own tax treatment:

  • Pre-tax 401(k) Contributions – pre-tax 401(k) contributions that you make to the plan are not included in your taxable income for the year. When you withdraw the 401(k) money you will pay income taxes on any amount withdrawn. This type of 401(k) contribution is best if you are in a higher tax bracket in the years you are making these contributions and expect to be in the same or a lower tax bracket in the years you will withdraw money from the 401(k) plan. If you have a lot of money already in tax-deferred accounts, you might want to do more long-term planning before deciding if you should contribute even more pre-tax money to the plan. Once you are retired, having too much money in tax-deferred accounts can hurt you.
  • After-tax 401(k) Contributions – with after-tax contributions you do not get a deduction for the contributions to the plan, but the money will grow tax-deferred. After-tax 401(k) contributions are very similar to non-deductible IRA contributions. At the time you withdraw these contributions, you will be taxed only on any gain, You have already paid income tax on the amount of the contributions themselves, so you will not pay income taxes on this amount when you withdraw it. Only some 401(k) plans allow after-tax 401(k) contributions. When you retire your after-tax contributions can be rolled to a Roth IRA.
  • Roth 401(k) Contributions – with a Roth 401(k) contribution the money goes in after-tax, and it grows tax-free. Having money in Roth accounts can be very advantageous to you when you are in retirement, as money withdrawn from your Roth is not taxable, and it is not included in the formula that determines how much of your Social Security income will be taxable. Roth contributions are best when you may be in a low tax bracket in the year you make the contributions and expect you might be in a higher tax bracket later when you take withdrawals. Roth 401(k) contributions are also an attractive choice if you have a long time to let the money grow tax-free, or if you already have substantial pre-tax savings and need to build up more money in after-tax accounts.

Depending on your tax bracket, it may make sense to make some pre-tax 401(k) contributions and some Roth 401(k) contributions. Good tax planning can make a significant difference in helping you decide what is appropriate for you.

Also, if your income varies from year to year, it may make sense to vary how you save from year to year. With one real estate agent client, in high-income years we had her make pre-tax 401(k) contributions and in low-income years she made Roth contributions.

How often should I change the amount I contribute?

Once you've decided on how much to contribute, you'll want to revisit the amount you contribute to your 401(k) plan from time-to-time depending on how your income changes and how the plan limits change. Most important, don't stop contributing and don't use your 401(k) for purposes other than retirement saving. Taking 401(k) loans and early withdrawals for other expenses is robbing you of investment gains that you'll need later in life.

401(k) Contributions for Self-Employed Persons

If you are self-employed, or if you and your spouse own a business in which you have no employees, you can set up a simplified version of a 401(k) plan that requires very little administration. There are several types of retirement plans for small businesses to choose from. 

The bottom line is saving money is good, and having money saved will open up opportunities for you in the future. So save as much as you can, but do the analysis to determine how much of your total savings should go into your 401(k) plan versus into after-tax savings accounts.

Your retirement plan is more than just your 401(k)..or should be. If you haven't sat down with a financial planner to put together a comprehensive plan, consider that as your next step.