How Much Should I Contribute to My 401(k)?

We're often told to save for our futures by contributing enough money from our paycheck, but this is easier said than done for many. In reality, a recent survey shows that 28% of Americans have nothing saved for retirement, 38% aren't contributing to any retirement fund and 30% believe they'll never be able to retire.¹ Some of the reasons for these numbers are the lack of understanding of the retirement savings plans available and how they can grow over time. Still, if you plan to retire, it's important to understand how much you may need to save. Here, we cover how much you should consider contributing to your 401(k).

Benefits of Creating a 401(k) Retirement Account

A 401(k) is a retirement savings plan offered by employers. It allows employees to save by contributing a certain percentage of their paycheck before taxes are taken out. Employers may also contribute to an employee's 401(k) plan, often matching a percentage of the employee's contributions. The pre-tax funds in a 401(k) grow tax-deferred until they are withdrawn, at which point they're subject to income tax. Some of the benefits of contributing to a 401(k) include:

• Pre-Tax contributions lower your taxable income for the year they're made.
• Automatic deductions from your salary mean you don't have to facilitate funding; it's done for you.
• If your employer will match contributions, you receive additional funds to help you save for retirement.
• 401(k) plans grow with compound interest, which may result in significantly higher returns on your investment.
• A 401(k) account is a portable retirement account, which is still yours even if you change companies.

Understanding 401(k) Contributions and Withdrawals

401(k) contributions are made through payroll deductions, where a specified percentage of an employee's pre-tax income is automatically transferred into their 401(k) account. Many companies offer matching contributions, meaning an employer contribution is made to match the employee contribution up to a certain limit. For example, an employer might match 50% of the employee's contributions, up to 6% of their salary.

The 401(k) funds are invested in various options, such as stocks, bonds and mutual funds, allowing the account to grow with compound interest over time. The pre-tax contributions and any investment gains are tax-deferred, meaning they are not taxed until the employee withdraws the money.

There are limitations to when you can withdraw money from a 401(k) plan.  Many 401(k) plans let you begin withdrawing money when you're close to retirement age. Many plans allow for an in-service withdrawal, which is a withdrawal without penalty, beginning at the age of 59-1/2, but some plans may permit this starting at age 55. If you need to withdraw beforehand, you'll encounter penalties, usually 10% of the amount withdrawn.

What is a Roth 401(k)?

Many 401(k) plans also offer a Roth 401(k) contribution option, which differs from a pre-tax contribution because your contributions are made after you've already paid taxes. They don't lower your taxable income, but you gain the advantage when you withdraw later, as the investment growth isn't taxed on qualified distributions.   A qualified distribution is when you have contributed to the Roth account for at least 5 years.  This means you won't have to pay additional taxes once you retire and start using the money.

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

It’s recommended to aim to contribute at least 10% to 15% of your gross salary to retirement savings and adjusting as needed*. However, you should choose a percentage of your salary that will maximize savings while allowing you to live comfortably.

If your company offers a match, it's recommended that you contribute at least enough to receive the full employer match. However, everyone's financial situation is unique, so the amount you should contribute isn't always the amount you can. It's important to consider your age, income, bills, debt, emergency savings, lifestyle, family, other retirement accounts and more. These factors will help you better understand how much to contribute each year.

Are There Limits to How Much You Can Contribute to Your 401(k)?

Contribution limits exist for both pre-tax 401(k) contributions and Roth 401(k) contributions, and they are adjusted each year to account for inflation. The annual contribution limits are set by the Internal Revenue Service (IRS). In 2024 the limit for combined 401(k) plans is $23,000. You can split this between traditional and Roth 401(k), but the sum cannot exceed $23,000.

Your plan administrator or payroll provider may have measures in place to help you avoid over-contributing to your 401(k) retirement plan. However, in some situations, like when you change jobs or get another job with a workplace plan, you may over-contribute. This can lead to higher taxes and penalties. Therefore, keeping track of your contributions  and managing them effectively is important.

Catch-Up Contributions

The government also allows individuals aged 50 or older to make higher contributions to compensate for past shortfalls. As of 2024, if you're at least 50, you can make additional yearly contributions of $7,500.

How to Maximize Your Retirement Savings

When you retire, you'll have access to Social Security benefits, but many people fear that won't be enough. Here are a few tips to help you make the most out of your 401(k) and other savings accounts like IRAs and Roth IRAs.

Start Saving as Early as Possible*

You need to start saving for retirement as early as you can. This doesn't mean you need to make enough to hit your contribution limit, but something is better than nothing. Think about how much you can contribute without causing any financial burden to your everyday life. You can adjust your contribution based on changes in your financial budget.

Aim to Contribute as Much as You Can

Any amount you can comfortably contribute will benefit you in the long run. The key is to make regular contributions and increase them whenever possible. If you cannot start with a higher percentage, begin with a smaller, manageable amount, such as 3% to 5% of your salary*. Over time, aim to incrementally increase your contributions, especially when you receive raises or bonuses. This gradual approach can make it easier to adjust your budget without significantly impacting your day-to-day finances.

Search for Jobs with Employer Matching

If you're currently unemployed or are looking for a career change, try to look for jobs that offer a company match. Employer matching programs vary, but they generally match a certain percentage of your contributions up to a specific limit, often around 3% to 6% of your salary. If you contribute enough to get the full match, you can effectively increase your contribution without additional cost.

Partner with a Financial Advisor

Understanding how much to save and when to start investing can be complicated. A financial advisor can help you create a tailored retirement plan that considers your unique financial situation and goals. They can also advise you on how to maximize your 401(k) contributions and other retirement savings.

Open a Traditional IRA

A traditional IRA is another type of retirement account that allows you to save pre-tax dollars. Contributions to a traditional IRA may be tax-deductible, and the investment gains grow tax-deferred until you withdraw the money in retirement. These are fairly similar to 401(k) plans. The primary difference is that an employer offers a 401(k), while an IRA is an account you would open on your own.

Open a Roth IRA

Roth IRAs are another type of individual retirement account that you can set up regardless of whether you're employed. Contributions to a Roth IRA are made with after-tax dollars, but the investment gains are tax-free, and withdrawals during retirement are not taxed. This can provide significant tax advantages in the long run for those who don't need to focus on lowering their tax burden for the current calendar year.

To help make retirement planning easier and more affordable, work with TriNet today. TriNet offers a multiple-employer retirement plan, which can give your company a competitive advantage while boosting employee retirement savings. We also offer comprehensive human capital consulting solutions to help you handle your toughest HR needs. Book a demo with us today to learn more.

*The percentage to contribute varies by individual situation. TriNet is not a financial advisor and does not provide financial advice. Please consult your financial advisor for any recommendations regarding financial matters.