How much should I contribute to my 401(k)?

What is a 401(k)?  

A 401(k) is a retirement savings plan offered by many employers in the United States to help their employees save for retirement. It is named after a section of the Internal Revenue Code.

With a 401(k) plan, employees can opt to contribute a portion of their pre-tax income to the plan up to certain annual limits set by the IRS. These contributions are generally deducted directly from the employee's paycheck. 

In some cases, employers may match a portion of the employee's contributions up to a certain percentage of the employee's salary. This employer match can vary from company to company and may be subject to a vesting schedule. This means that you may need to work for your company for a certain period before you are entitled to the full amount of the employer's contributions. 

Employees' money contributed to a traditional 401(k) plan (as opposed to a Roth 401(k)) is typically not subject to income tax in the year it is earned. Instead, it’s taxed when withdrawn during retirement, meaning contributions can grow tax-deferred over time. 

401(k) plans typically offer a range of investment options, such as mutual funds, stocks, bonds, and other investment vehicles. You can choose how to allocate your contributions among these investments based on your risk tolerance and retirement goals.

How much should you contribute to your 401(k)? 

The ideal contribution amount to a 401(k) can vary widely from person to person, and there is no one-size-fits-all answer. 

The appropriate contribution level depends on various factors, including income, retirement goals, other retirement savings, and current financial circumstances. 

With that in mind, here are some guidelines to help you determine how much you should contribute to your 401(k):

Company matching 

If your employer offers a matching contribution, it's generally recommended to contribute enough to your 401(k) to take full advantage of this benefit. For example, if your company matches 3%, it can be wise to contribute at least up to 3% to take full advantage. Company matches are essentially free money; not contributing enough to get the full match means you're leaving that money on the table.

Income percentage 

A common rule of thumb is contributing around 10% to 15% of your pre-tax income to your 401(k). However, this percentage can vary depending on your financial situation. You might want to contribute more if you're starting late or have ambitious retirement goals. Conversely, you might contribute less if you have other significant financial obligations or debt to pay off. 

Retirement goals 

If you want to retire early or have an extravagant retirement lifestyle in mind, you may need to contribute a higher percentage of your income to your 401(k) to try and achieve those goals. Conversely, if you plan to work longer or have more modest retirement goals, you may be able to contribute less. 

Other retirement savings 

Consider any other retirement savings outside your 401(k), such as IRAs, pensions, or other investments. Your overall retirement savings strategy should be diversified; your 401(k) is just one part. 

Financial responsibilities 

Assess your current financial responsibilities, including debt payments, emergency savings, and other financial goals (e.g., buying a house, paying for education). It's essential to balance saving for retirement and addressing immediate financial needs. 

Tax considerations 

Think about the tax implications of your contributions. Contributions to a traditional 401(k) are tax-deductible, which can lower your current tax bill. However, you'll owe taxes on withdrawals in retirement. There can be advantages to that, which a financial advisor may help spell out for you.

In contrast, contributions to a Roth 401(k) are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. Your current tax bracket and your retirement tax bracket could influence your choice between traditional and Roth contributions. 

Automatic Increases 

Many 401(k) plans offer the option to set up automatic contribution increases over time, such as an annual percentage increase. This can be a good way to gradually increase your savings rate without giving it much thought.

What are the contribution limits for a 401(k)? 

The IRS sets the contribution limits for a 401(k) plan, which can vary yearly. In recent years, both traditional and Roth 401(k) limits have increased to account for inflation. 

As such, the contribution limit for the 2024 tax year is $23,000, and for the 2025 tax year (the tax return you will file in 2026), it will increase to $23,500. For 2025, the overall (combined employee and employer) contribution limit is $70,000.

How do 401(k) contributions change with age? 

Generally, the earlier you can begin contributing to an employer-matched 401(k), the better. Although the contributions don’t change, you’ll receive the benefit of employer contributions for longer. In all, it means you have more time to save and your investments to (hopefully) grow.

401(k) savers 50 or older can make additional catch-up contributions to their 401(k) plans on top of the standard contribution limit. For the 2025 tax year, this catch-up amount is capped at $11,250. This is intended to help older workers behind their retirement savings catch up as they approach retirement age. 

The standard employee contribution limit remains the same regardless of age. So, a person under 50 and a person over 50 have the same limit for their contributions, but the older individual can make additional catch-up contributions.  

What are your other retirement savings options? 

401(k) plans aren’t the only option for retirement savings; there is a huge range of accounts to choose from. Note, though, that 401(k)s are only available through an employer, and if your employer doesn’t offer one, you’re out of luck. 

However, depending on your situation and financial goals, any of the following could be suitable: 

Traditional IRA 

Contributions to a traditional IRA may be tax-deductible, depending on your income and whether an employer-sponsored retirement plan covers you or your spouse. Earnings in a traditional IRA grow tax-deferred until withdrawal. 

Roth IRA 

Contributions to a Roth IRA are made with after-tax dollars and are not tax-deductible, but earnings and qualified withdrawals in retirement are tax-free. 

403(b) and 457 Plans 

These retirement plans are similar to 401(k) plans, but they are typically offered by non-profit organizations (403(b)) and government entities (457). They have similar tax advantages and contribution limits. 

SEP-IRA (Simplified Employee Pension IRA) 

Designed for self-employed individuals and small business owners. 

SIMPLE IRA (Savings Incentive Match Plan for Employees IRA) 

Geared toward small businesses and allows both employer and employee contributions. 

Solo 401(k) (Individual 401(k) or Self-Employed 401(k)) 

Designed for self-employed individuals with no employees other than a spouse. 

Pension plans (Defined Benefit Plans) 

Typically offered by larger employers, these provide a fixed retirement benefit based on factors like years of service and salary. 

Profit-Sharing Plans 

Employer-sponsored plans where contributions are tied to company profits. 

What tax do you pay on your 401(k)?  

401(k) retirement plans use funds already taxed, so you only pay tax on earnings throughout the plan. 

This deferred tax means that you should keep accurate account records to ensure no big tax surprises when withdrawing from your 401(k) plan. 

If you withdraw money from your 401(k) early (before age 59.5), you’ll be hit with a 10% penalty and an income tax liability. There are some exceptions to that rule, though.

Get expert financial advice

The earlier you begin contributing towards an employer-matched 401(k) retirement plan, the more you stand to potentially gain over the life of the plan in employer contributions (free money). 

If you’re starting to save in your 20s, then 10% of your income may suffice throughout your career. If, on the other hand, you’re late to the 401(k) savings game, you should contribute as much as you can afford, ideally around 20% of your earnings.

As with any investment or financial planning, getting the opinion of a financial advisor means leaving less to chance. 

Unbiased can put you in touch with experts who are ready and waiting to help.