If your employer offers a 401(k) with matching contributions, then you should contribute enough to get the full match.
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Table of contents
What’s a 401(k)?
A 401(k) plan is an employer-sponsored, tax-advantaged retirement account. It’s important to note that not all employers offer a 401(k). If your employer does, consider making contributions.
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There are two types of 401(k) accounts, Roth and traditional.
With a traditional 401(k), your contributions are made before taxes, and you’re taxed when you make withdrawals. A traditional 401(k) allows your money to grow tax-deferred.
Contributions for a Roth 401(k) are made after being taxed, which means you won’t be taxed when you make withdrawals. A Roth 401(k) allows your money to grow tax-free.
How much should I contribute?
Although experts say you should save at least 15% of your pre-tax income each year for retirement, there isn’t a specific amount that’ll work for everyone, and it doesn’t have to entirely go into your 401(k) (Source: Fidelity).
To figure out how much you should contribute to your 401(k), consider the following:
- Company matching. Does your company match contributions? If so, how much? The least you should contribute is the maximum amount that your company matches.
- Contribution limits. For 2021, the maximum that you can contribute to a 401(k) is $19,500. If you’re older than 50, you can contribute an extra $6,500 (Source: IRS).
- How much you’ll need for retirement. When do you want to retire, inflation, and how much money you want to retire with? Consider how much you want to rely on social security and your retirement income amount, which will most likely be less than pre-retirement.
The exact amount that you contribute is up to you. If your company matches contributions up to a percentage, take advantage of it, and make that the minimum amount that you contribute.
Consider an IRA
Once you’ve contributed the amount that your company matches or the entire 401(k) contribution limit, consider opening an Individual Retirement Account (IRA).
An IRA is an excellent way to supplement your 401(k), giving you another way to save for retirement.
For 2021, the IRA contribution limit is $6,000. If you’re older than 50, the limit increases to $7,000 (Source: IRS).
Similar to the 401(k), you can choose between a Roth and a traditional IRA. The same benefits apply, as the Roth IRA grows tax-free and the traditional IRA grows tax-deferred.
One of the biggest factors of which one you choose is income. The traditional IRA doesn’t have an income limit. However, the Roth IRA has a maximum income limit.
If you’re a single filer, the maximum modified adjusted gross income must be less than $125,000. If you file jointly, your combined maximum modified adjusted gross income must be less than $198,000.
Frequently asked questions
You can rollover your 401(k) into a new plan or an IRA.
You can withdraw from your 401(k) when you reach age 59½ or incur financial hardship.
You can only contribute your entire salary if you make $19,500 or less because the maximum contribution amount is $19,500.
Figuring out how much to contribute to your 401(k) is based on factors such as age, the amount needed for retirement, company matching, and other investments. The sooner you start, the less you’ll need to contribute in the future.
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About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.