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

1 min readLast updated November 10, 2023by Rachel Carey

How much you contribute towards your 401(k) depends on several factors, including age, income and the level of employer contributions. We consider what a 401(k) is, look at contribution limits and how these change throughout your career into retirement.

What is a 401(k)?  

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

With a 401(k) plan, employees can contribute a portion of their pre-tax income to the plan up to certain annual limits set by the IRS. These contributions are often then 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 to a traditional 401(k) plan 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 Instead, it’s taxed when withdrawn during retirement, meaning contributions can grow tax-deferred over time.  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.  

We’ve put together 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. Company matches are essentially free money; not contributing enough to get the full match means you're leaving money on the table. 

Income percentage 

A common rule of thumb is contributing around 10 to 15 percent of your pre-tax income to your 401(k). However, this percentage can vary depending on your financial situation. You might aim 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 debts. 

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 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.  

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 significantly impacting your paycheck. 

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

The contribution limits for a 401(k) plan are set by the IRS and can vary yearly.  

Both traditional and Roth 401(k) limits have increased year on year to account for inflation. This meant a limit increase from $20,500 in 2022 to a limit of $22,500 in 2023. There’s also an overall contribution limit, including your and your employer’s contributions. In 2023, this limit is $66,000, a $5,000 increase on the previous year’s allowance. 

How do 401(k) contributions change with age? 

The earlier in your career, you 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. 

401(k) savers 50 or older can make additional catch-up contributions to their 401(k) plans on top of the standard contribution limit. At 2023 rates, this catch-up amount is capped at $7,500. 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 both had the same limit for their own contributions, but the older individual could 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. 

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 are retirement plans similar to 401(k) plans but 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. 

The bottom line 

So, how much should you contribute to your 401(k) plan?  

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

If you’re starting to save in your 20s, then 10 percent of your income should 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 percent of earnings. You should also take advantage of the increased catch-up contribution limit, currently $7,500 for savers over 50. 

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 ready and waiting to help

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.