How much of my salary should I contribute to my 401(K)?
Unlike our parents and grandparents, it is an anomaly for your employer to offer a defined benefit plan or pension unless you are a federal government or state employee. However, the vast majority of empoyers offer some sort of 401(k) plan. How much should you contribute to your 401(k)? If you are not offered a pension plan, you should contribute as much as possible to your 401(k) plan(so that you will still be able to meet all of your financial needs). We believe that contributing at least 10-15% of your gross salary should be the minimum at which you should save.
Pre-tax & after-tax contributions
With each defined contribution or 401(k) plan, you can contribute both pre-tax and after-tax. This after-tax contribution is also known as a Roth contribution (not to be confused with a Roth IRA). The amount that you can contribute pre-tax in 2020 is $19,500, and the annual contribution limit is $57,000. In addition, employees over the age of 50 may contribute an additional $6,500 pre-tax to their 401(k) plan.
Why you should contribute to your 401(K) plan
The appeal of contribution to a 401(k) plan is that it gives you the opportunity to make pre-tax contributions up to $19,500. This means that income tax will not be withheld on these contributions and these contributions will lessen your annual income tax liability. Furthermore, many employers also have matching provisions and safe harbor elections they must make to ensure these plans remain qualified. Lastly, 401(k) plans allow for investments to compound and grow tax-deferred. This means that you will not have an income tax liability on distributions and dividends received from investments in your retirement account.
What percentage should you contribute?
It should be everyone’s goal to at least fund the elective deferral amount to their employer’s 401(k) plan, and in 2020 this is $19,500. However, for many this is a lot of money, so we believe contributing at least 10-15% of your gross salary should be the minimum at which you should save. It is a very simple mantra, but something is better than nothing.
Review your 401(K) with the experts
When we review your 401(k) plan, we first determine if your employer offers a matching provision, and then we determine how much you can afford to contribute based on your cash flow and financial profile. After these steps have been determined the last step is we analyze the mutual fund offerings on your employer’s 401(k) plan and pick the investments best suited for your overall portfolio allocation and success for long term growth.
If you’d like to get an individualized answer or recommendation for 401(k) contribution, don’t hesitate to contact us today!
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