A 401k is a good way to build tax deferred wealth, but deciding what amount to contribute is challenging. The amount to withhold from each paycheck might depend on a number of factors, including your age, income and financial needs, as well as whether your employee offers matching contributions. It is important to follow a few basic guidelines to determine how to calculate the percentage you should contribute.
Top Contribution Method: Max Your 401k Percentage
If you want maximum funding for your 401k plan, then determining the contribution percentage is straightforward, even without a 401k max contribution calculator. The maximum contribution per year is age based and changes depending on whether you're age 50 and over, or whether you're under the age of 50, as set forth below. To calculate the correct percentage to contribute, divide the annual limit by the number of total yearly paychecks. The result should then be divided by your gross salary per paycheck to learn the contribution percentage.
Maximize Employer 401k Matching
If you can't afford to contribute the maximum amount, another 401k strategy is to contribute at least up to your employer's contribution matching percentage. Most employers match a percentage of contributions ranging from 1 percent to 6 percent. For example, your employer might offer a match 100 percent of your contributions up to 5 percent. Therefore, if you contributed 5 percent per paycheck to the 401k plan, you would receive the maximum matching contribution from the employer, and your employer would contribute another 5 percent to your retirement plan. You can use a 401k match calculator to determine what the total contribution would be from all sources, as some employers take a more complex approach and only contribute a percentage of a percentage, or a flat dollar amount.
A different 401k strategy is to begin contributing 1 percent of your salary and slowly adjust the contribution level up over time. This gradual approach helps you avoid budget shocks stemming from suddenly lower cash flow. Eventually you can ratchet up the 401k percentage contribution when salary levels climb.
If you prefer to keep your take-home pay pretty consistent from year to year, you can simply pick a percentage that works for you and maintain it. This keeps your paycheck contribution steady. Dollar-wise, a little more money will go into your 401k plan every year if you earn annual raises and bonuses.
2017 and 2018 401k Contribution Limits
In the 2017 tax year, the contribution limit per year per person was $18,000, meaning you could not contribute more than that total in the year 2017 to your 401k. The figure went up to $18,500 for 2018, and it may increase again in the future to account for inflation.
For example, if you make $200,000 per year and contribute 10 percent of each paycheck's pretax dollars, you'll be over the limit, as your contributions would reach $20,000 for the year. Your plan will stop taking contributions after you reach $18,500. However, if you turned 50 during the calendar year or you are over 50, you may be able to make additional contributions depending upon the type of 401k plan and how much you've already contributed. These "catch up" contributions are $6,000 for traditional and safe harbor 401k plans or $3,000 for SIMPLE 401k plans.
Importantly, your 401k contribution limit only applies to your contributions, not to your employer's matching contributions. If you contribute the max $18,500 from your pay in 2018, your employer's additional contributions are still permitted.
FAQs
Contribution percentage
How do I figure out what percentage I should contribute to my 401K? ›
However, regardless of your age and expectations, most financial advisors agree that 10% to 20% of your salary is a good amount to contribute toward your retirement fund.
How do you calculate how much to contribute to 401K to max out? ›
To calculate the estimated contribution amount you'll need to make from each paycheck to max out by the end of the year, simply subtract your current annual contribution total from the annual employee contribution limit, and divide it by the remaining number of paychecks for the rest of the year.
What percentage should I contribute to my 401K including employer match? ›
Once you're contributing enough to get your employer match, consider saving even more. Fidelity suggests saving 15% of your pre-tax income for retirement, which includes the match. If your employer gives you 6%, ideally you would put aside 9% of your salary to hit the target (6% from your employer + your 9% = 15%).
What does 50% of 6% 401K match mean? ›
The most common partial match provided by employers is 50% of what you put in, up to 6% of your salary. In other words, your employer matches half of whatever you contribute … but no more than 3% of your salary total. To get the maximum amount of match, you have to put in 6% of your salary.
What percent of your salary should you put in 401k? ›
Most retirement experts recommend you contribute 10% to 15% of your income toward your 401(k) each year. The most you can contribute in 2023 is $22,500 or $30,000 if you are 50 or older (that's an extra $7,500).
How to calculate employer contribution to 401k? ›
If you have an annual salary of $100,000 and contribute 6%, your contribution will be $6,000 and your employer's 50% match will be $3,000 ($6,000 x 50%), for a total of $9,000. If you only contribute 3%, your contribution will be $3,000 and your employer's 50% match will be $1,500, for a total of $4,500.
What is the maximum 401k contribution based on salary? ›
More In Retirement Plans
The annual limits are: salary deferrals - $23,000 in 2024 ($22,500 in 2023; $20,500 in 2022; $19,500 in 2020 and 2021 and $19,000 in 2019), plus $7,500 in 2023; $6,500 in 2020, 2021 and 2022 ($6,000 in 2015 - 2019) if the employee is age 50 or older) (IRC Sections 402(g) and 414(v))
How much do I need in a 401k to get $2 000 a month? ›
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000. For $3,000 per month, you would need to save $720,000, and so on.
How much should I contribute to my 401k without employer match? ›
» Learn more: Our 401(k) calculator can help you see how your contributions add up. If your employer doesn't offer a match (or if you're deciding whether to contribute more than you need to get the match) and have no idea where to start, a general rule of thumb is to consider saving 10% to 15% of your income.
Imagine you earn $60,000 a year and contribute $1,800 annually to your 401(k)—or 3% of your income. If your employer offers a dollar-for-dollar match up to 3% of your salary, they would add an amount equal to 100% of your 401(k) contributions, raising your total annual contributions to $3,600.
What percent of employees contribute to a 401k? ›
Yet, the survey found nearly 6 out of 10 workers, 57%, are contributing to a 401(k) or company-based savings account. The CNBC Your Money Survey found that, among those who are contributing, here's how they're funding their 401(k) plan: 46% are contributing as much as they can afford.
Is 7% a good 401k match? ›
A study by Vanguard reported that the average employer match was 4.5% in 2020, with the median at 3% of salary. In 2023, if you're getting at least 4% to 6% in 401k employer matching, it's considered a “good” 401k match. Anything above 6% would be considered “great”.
What is a good 401k contribution? ›
Many companies offer 401(k) plans to encourage employees to save for retirement. Some even match contributions you make yourself. Aim to save at least 15% of your pretax income each year for retirement (including employer contributions). This can be in a 401(k) or another retirement account.
How much should I contribute to my 401K each paycheck? ›
For that reason, many experts recommend investing 10-15 percent of your annual salary in a retirement savings vehicle like a 401(k). Of course, when you're just starting out and trying to establish a financial cushion and pay off student loans, that's a pretty big chunk of cash to sock away.
What is a good percentage to take out of your 401K? ›
The 4% rule is when you withdraw 4% of your retirement savings in your first year of retirement. In subsequent years, tack on an additional 2% to adjust for inflation. For example, if you have $1 million saved under this strategy, you would withdraw $40,000 during your first year in retirement.
What percentage of my 401K should be in stocks? ›
In the ideal scenario, the older investor has stashed those big early gains in a safe place while still adding money for the future. Traditional guidance is that the percentage of your money invested in stocks should equal 100 minus your age.
How much should you have in a 401K by 40? ›
Fidelity says by age 40, aim to have a multiple of three times your salary saved up. That means if you're earning $75,000, your retirement account balance should be around $225,000 when you turn 40. If your employer offers both a traditional and Roth 401(k), you might want to divide your savings between the two.
