How Much Should I Contribute to my 401k?

If you’re working a full-time job, and your employer offers a 401k retirement plan, then accepting it should be a no-brainer. It’s a great way to stash money and rack up long term tax benefits, while also leveraging employer match contributions (aka free money).

Here’s an odd thing, though: Many workers today aren’t maximizing 401k retirement contributions. In fact, only one-third of employees are actively contributing to a 401k plan.

One of the top issues that hold employees back from maximizing their 401k accounts is that they simply don’t know how much to contribute.

So, how much should you actually contribute to a 401k? The short answer is much as you can, but your actual number depends on a few factors, which you’ll learn about in this post.

First, here is a refresher on how 401ks work.

What is a 401k?

Before you start investing in a 401k account, it’s a good idea to know how it works and what it offers.

A 401k is a special type of retirement account that allows employees to set aside a portion of their salary for long-term investing. In some cases, you can even benefit from a company match, up to a certain amount.

A 401k is eligible for certain tax benefits from the IRS, as it’s considered a defined-contribution (DC) plan. In most cases, employees are restricted about when and how they can access the money in their accounts without penalties.

Why Use a 401k?

One of the top reasons employees use 401k accounts is because it’s a chance to get matching contributions from their employer, in addition to their annual salary. An employer may choose to make periodic 401k contributions, providing additional revenue-generating opportunities along with the potential to maximize income through tax-deferred programs.

Using a 401k is one of the easiest and most rewarding retirement plans, and should be a no brainer for workers who are actively putting money aside to fund their golden years.

How Much Should You Contribute to a 401k?

Most financial advisors will recommend that total contributions amount to roughly 10 to 15 percent of your salary. However, this might not be right for you.

For example, if you’re just starting out in your career, chances are you will have student loans, credit card debt, rent, car payments, grocery bills — the list goes on. For some people, contributing 15 percent to a 401k may not be realistic, especially if you want enough money left over to enjoy your life (and fund periodic concerts, bar tabs, or road trips).

One of the hardest parts about planning for retirement is determining whether you should prioritize your youth, have fun in your prime earning years, or prioritize your golden years and be frugal while working. Only you can determine the right balance in your approach to retirement planning.

401k Contribution Limits

If you’re in a position to max out your 401k, that means you’re in great shape financially today and down the road. You’re earning a decent amount of money in your full-time job, and you’re able to put your money away for your future self.

In 2021, the maximum amount that you can put into a 401k is $19,500. In 2022, the 401k maximum contribution amount will also be $19,500 according to the IRS.

How to Invest After Maximizing Your 401k

One question that young investors often have is how they should invest after they maximize their 401k.

The good news is that it’s possible to continue saving and maximizing tax benefits after reaching the limit on your 401k account.

Here are three options to consider:

Traditional IRA

A traditional individual retirement account (IRA) account acts much like a 401k. The difference is that it comes with a smaller annual contribution limit. In the tax year 2021, this is $6,000.

With a traditional IRA, you receive an income tax deferral upfront and don’t have to worry about paying taxes until retirement.

Roth IRA

The main difference between a Roth IRA and a traditional IRA is that with a Roth, you’ve already paid taxes on the money you’re investing, and you won’t have to pay taxes on your gains until your retirement age of 59 ½. Just like a traditional IRA, the contribution limit for 2021 is $6,000.

Life Insurance

People are often surprised to learn that life insurance can be used as a tax-friendly retirement vehicle.

In other words, most investors choose to purchase life insurance with minimal monthly premiums, and death benefits. But certain cash account plans are available that allow you to grow after-tax contributions at a guaranteed interest rate. The amount you can earn depends on the provider, so talk to your financial advisor or life insurance agent to learn if this strategy makes sense for you.

The most important message here is not to be dismayed about 401k contribution limits. If you’re in a position where your income has started to pick up, and you’ve already maximized your employer contributions, there are many options available to fund further retirement options. Poke around and find a plan that works for you.

Tips to Make Life Easier for Savers

Let’s face it: Planning for retirement and leveraging a 401k is not easy. But there are things you can do to reduce the impact of storing money away each month.

Avoid Bad Debt

Do whatever you can to avoid running into credit card debt. The more credit card debt that you rack up, the harder it is to get out of the hole. In fact, some people rack up so much credit card debt while they’re young that they can never escape it — and spend the rest of their working years struggling to meet sky-high minimum payments.

The easiest way to avoid credit card debt is to be strict about sticking to what you can afford. You’ll have more money to put into your 401k, and more to spend on yourself.

Diversify Your Investments

Another thing to keep in mind about using a 401k is that you may need to actively manage your account.

Depending on your employer’s plan, you may have several funds to choose from. Be cautious to understand the underlying investments that make up the fund, to match the risk level with your personal tolerance, and to diversify if the fund is heavily weighted in a single industry or vertical.

After all, your 401k account is your money — your employer just contributes to it. So it’s very important to take some responsibility for its overall performance.

Best practices suggest diversifying your investments with high performing stocks, index funds, ETFs, and mutual funds. It’s also important to form a long-term growth investing strategy that maximizes your investment returns.

If that’s overwhelming, choosing a target fund that matches your desired retirement date is a simple, hands-off approach that will automatically adjust its asset allocation as that year gets closer.

Consider a Financial Advisor

It’s okay to admit that you’re in over your head with personal finance. After all, you’re not a Wall Street investor — just an average worker trying to maximize your investments.

If you don’t have the time or energy to put in the real work that it takes to own your finances, consider working with a financial advisor — either through an automated index fund, robo advisor account, or an actual human. These services can help you navigate the complexities of investing and make the right decisions — either with you or on your behalf.

401k: Pros and Cons


  • Tax-free growth
  • High contribution limit
  • Easy approach retirement savings


  • Can’t access your money before retirement
  • It can make you lazy with other investments
  • Limited investment options


What does pre-tax mean?

A 401k account is funded using pre-tax dollars. In other words, your employer will pay you but taxes will not be taken out, because the money is going into the 401k account. This means you won’t have to pay taxes income until you retire.

People sometimes get confused and think that they don’t have to pay taxes on money that goes into a 401k account. This is not true. You will eventually have to pay taxes, though likely at a lower rate since your income (and tax bracket) should be lower once you retire.

What’s a catch-up contribution?

Individuals over the age of 50 are allowed to make annual catch-up contributions to their 401k account. Congress allowed for catch-up contributions out of concern that Baby Boomers were behind in their retirement savings.

Catch-up contribution limits for 2021 are up to $6,500 — an increase from $6,000 from 2015 to 2019.

Does everyone need a retirement account?

In short, yes — all workers need special funds to maximize retirement dollars.

The reason is that retirement accounts like 401ks and IRA contributions can allow you to significantly reduce taxable income because contributions and gains aren’t taxed until you retire and access the money. As a result, you should experience the benefits of compounding interest and passive wealth creation over time.

You don’t have to have a retirement account to retire. But, the more money you have saved, the better off you’ll be when you eventually throw in the towel and stop working. Without a retirement account, your retirement income may only come from Social Security, which might not be enough to cover your expenses.

Is Social Security enough for retirement?

One common objection to planning for retirement is that you can just live on Social Security. However, this is not necessarily a great plan by any means.

Consider the fact that in 2020, the average Social Security payment was just $1,514 per month. If that’s all you have coming in, you’re looking at an annual gross income of just $18,036.

Social Security is also based on a variety of factors, the most important ones being earning history, work history, birth year, and claiming age. Oftentimes, people bank on receiving healthy Social Security payments only to find out that they are due for much less than anticipated.

Regardless of how much you are entitled to earn in retirement from Social Security, you don’t want to be in a position where you are reliant on government payouts for necessities like rent and groceries. Put money aside while you are working to ensure comfort and stability during your later years.

Is a 401k a nest egg?

A 401k is a great example of a nest egg.

A nest egg refers to a substantial amount of money that grows and provides a handsome rate of return over time. The longer that you keep a nest egg and add to it, the bigger the nest egg will become.

If you start planning a nest egg through a 401k when you are young, it’s almost guaranteed to reach a substantial figure by the time you retire.

Can you access a 401k before retirement?

If you experience financial hardship, like the loss of a job, or a medical accident, you may be able to access your 401k earnings before retirement. Each plan has different rules for how much you can take out. In many cases, you’ll have to take a loan out against your 401k, to avoid penalties.

The thing to keep in mind is that tapping into your 401k plan early is complicated and not recommended. You may wind up paying a stiff 10 percent early withdrawal penalty to the federal government.

To prevent this from happening, consider building an ancillary retirement savings plan that you can draw from if you really need money. This will prevent you from having to take money out of your 401k plan or taking out a loan. This is also why you always want to have an emergency fund stashed away in a savings account.

The Bottom Line

The most important takeaway from this article is this: Maximize your 401k contributions if you can. So that means depositing $19,500 for the year 2021. Your job might even match employee contributions, which means each year you can put in well over $19,500.

But you should do more to plan for retirement.

A 401k account is an excellent retirement vehicle. However, it’s just one piece of the puzzle. There are many types of investments to consider, and ways to grow your money during your working years.

So, after maximizing your 401k plan, the next step is taking the leftover money and putting it into another strategic account. Trust me, you’ll thank yourself later!

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  • Comment Author image blank
    Please clarify for me if there would be any circumstances that any individual would NOT maximize 401K contributions. Is it enough to put the recommended $19,500 into any retirement modality?