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How much of my salary should I put into my 401k?

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There’s no hard and fast rule for how much of your salary you should put into your 401(k). But, in general, you should always consider contributing as much as possible, depending on your specific financial circumstances.

A combination of factors will dictate how much you should personally save, including:

How much of your take-home pay you can afford to set aside

Your age

Whether you think your retirement savings are on track to meet your goals

How close you are to retirement

Increasing your 401(k) contributions can add up

Over time, even a seemingly small percentage difference in your contribution rate can make a big difference. Below is a hypothetical illustration of total amount accumulated over 30 years, based on an annual salary of $75,000.

Contributing 6%: $367,221; contributing 10%: $612,035

This hypothetical illustration assumes a salary of $75,000, contribution rates of 6% and 10% with contributions made at the beginning of the month and a 6% annual effective rate of return. Hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate and when redeemed the investments may be worth more or less than their original cost. Taxes are due upon withdrawal. If you take a withdrawal prior to age 59½, you may also be subject to an additional 10% tax unless an exception applies.

“A number of people have benefited from contributing and investing as much money as possible in a 401(k) account, within certain limits,” says Bill Hunter, director, Retirement Client Experience, Strategy & Solutions at Bank of America.

Know your maximum contribution limit

Start by understanding how much you’re allowed to contribute, and work back from there. Your maximum contribution limit depends on how old you are. In 2019, if you’re under age 50, you can contribute up to $19,000 per year; those age 50 or older can contribute up to $25,000 per year, as long as your employer’s plan permits catch-up contributions. These limits do not include any contribution match that your employer might provide. The combined employee-employer contribution limit for 2019 is $56,000, or $62,000 for individuals eligible for catch-up contributions (if plans permit).

Take advantage of company matching

If you are fortunate enough that your employer offers to match your 401(k) contributions, consider contributing at least as much as the percentage your company will match. Say your employer will match up to 6% of your salary—then aim to contribute at least that much, if you can, to take full advantage of the benefit.

“Matching contributions are essentially free money, and you may want to take advantage of them while you can.”

–Bill Hunter, director, Retirement Client Experience, Strategy & Solutions at Bank of America

“Matching contributions are essentially free money,” says Hunter, “and you may want to take advantage of them while you can.” Putting that money into a Roth 401(k) may be a good option if your employer offers it. Qualified withdrawals1 from a Roth 401(k) are federal income tax-free, which can help to reduce your tax burden in retirement.

Create an emergency fund so you won’t have to tap your 401(k) account early

Before maxing out your contributions, make sure you have money set aside in an emergency fund—three to six months’ worth of living expenses is generally considered enough—as well as whatever you need to cover short-term goals like paying off debt and loans. You don’t want to be caught in a situation where you’re forced to withdraw funds from your 401(k) account before age 59½. In that case, your withdrawal will be taxed as ordinary income and may be subject to a 10% additional federal tax, unless an exception applies.

Learn more and take action

  • Try our new tool to learn how you may be able to build both your 401(k) and health care savings accounts as you prepare for expenses in retirement.
  • How much do you need for the retirement you envision? Find out if you’re on track by trying our Retirement Planning Calculator.
  • If your 401(k) is with Merrill, changing your contribution rate is faster and easier than you may think. Go to Benefits OnLine® or our mobile app to select the amount that’s right for you.
 
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1 Any earnings on Roth 401(k) contributions can generally be withdrawn tax-free if you meet the two requirements for a “qualified distribution”: 1) At least five years must have elapsed from the first day of the year of your initial contribution, and 2) You must have reached age 59½ or become disabled or deceased. If you take a non-qualified withdrawal of your Roth 401(k) contributions, any Roth 401(k) investment returns are subject to regular income taxes, plus a possible 10% additional federal tax if withdrawn before age 59½, unless an exception applies. State income tax laws vary; consult a tax professional to determine how your state treats Roth 401(k) distributions.

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