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See estimates of how much your retirement investments could grow over time by using our 401(k) calculator and prepare for your future today.
How Much Should I Contribute to My 401(k)?
Deciding how much to contribute to a 401(k) depends on your income, financial obligations, tax bracket, and other factors like the need to build an emergency fund.
However, the income tax deferral on your contributions (or the tax-free distributions for a Roth 401(k) makes it a valuable investment vehicle for future retirees.
Additionally, the opportunity to receive any employer matching contribution available is extra money you won’t want to leave on the table by not contributing enough.
You can defer up to a max of $20,500 of your W-2 income for the 2022 tax year. You would contribute approximately $1,700 of your income per month if your goal was to contribute the max amount for 2022.
Additionally, if you are 50 or older, then you may make catch-up contributions for an extra $6,500 in 2022.
Financial experts often recommend contributing between 10 and 20% of your paycheck to a 401(k). At a minimum, consider contributing the amount necessary to receive any employer match.
Below are some key definitions of important terms you should know. Understanding their meaning is essential for incorporating this type of retirement account into your investment portfolio.
401(k): A retirement savings plan offered through your employer and gets its name from a subsection of the Internal Revenue Code. With a traditional 401(k), you defer payment of income tax until you withdraw the money in retirement.
Interest: A term that refers to the appreciation of your money over time when you invest your 401(k) funds into various products like stocks, bonds, ETFs, or mutual funds.
Contribution limits: The amount you can contribute to your 401(k) each year. The current limit is $20,500 for 2022 – unless you qualify for a catch-up contribution of $6,500.
Catch-up contribution: An additional amount that employees close to retirement age can contribute to their 401(k). Workers over 50 can make larger catch-up contributions to their 401(k) ($6,500 in addition to the standard $20,500).
Annual salary: The gross amount of money you make from your W-2 wages (before subtracting taxes, insurance, and other deductions). This number is important for understanding how much money your employer may contribute via matching and how much you’ll need to contribute to receive it.
Retirement age: The age at which you plan to retire. Knowing your retirement age is key to knowing how much you need to save and what you can take as distributions from your 401(k) based on life expectancy.
Annual rate of return: The amount you anticipate your investments in a 401(k) to grow over a period (e.g., a year). Using our 401(k) growth calculator, you can see how the size of your portfolio can change with different rates of return.
Employer match: The amount your employer will contribute to your plan. Generally, you will have to contribute a minimum amount to receive the benefit of the employer match.
Employer maximum: The total amount you can contribute to a 401(k) from both employee and employer contributions. In 2022, the employer maximum is $61,000.
Compound interest: The reason for exponential growth of investments in your 401(k). Compound interest comes from earning interest on top of previously earned interest.
Income tax: A federal tax based on the amount of income you earn in a calendar year. Understanding your income tax bracket is essential for optimizing your contributions into a 401(k) and choosing between a traditional 401(k) versus a Roth 401(k). The higher your tax bracket, the more benefit you will likely receive from contributing to a traditional 401(k) because of the tax deferral.
Which types of investments are in a 401(k)?
Most 401(k)s will offer a variety of stock, bond, mutual fund, and ETF holdings. The specific offerings will depend on your employer and the plan offerings of the institution that manages its 401(k).
How much of each paycheck should go to a 401(k)?
This depends on the size of your paycheck and your financial obligations. However, financial experts often recommend starting by contributing 10 to 20% of your paycheck.
How much does a 401(k) reduce taxes?
You could either defer paying tax on the amount contributed to the plan because you pay tax when you withdraw the funds in retirement.
Alternatively, contributing to a 401(k) may reduce your tax rate because your annual income will be less, which can lower the amount you pay overall.
How is our calculator different than Dave Ramsey, Fidelity, or NerdWallet’s?
All of the calculators will provide you with similar data, but our 401k calculator is designed for simplicity and accuracy when it comes to overall user experience.