(888) 490-8779

Expert Advice: Here is How Much You Should Put in Your 401k

| All, 401k plan

The day will come when you leave the workforce, which is why you must plan ahead and be as prepared for that inevitable day as you can. Upon its arrival, it will likely be necessary to make some adjustments to the household budget. One way to ensure that you have enough to live comfortably is to start a 401(k) plan now, and make regular contributions to the plan; the best day to start investing is yesterday.


If you're not sure how a 401(k) works, or what you can do to enjoy the maximum benefits from the plan, it pays to learn more about this type of financial plan- it pays best to enlist fiduciaries to help you do so. How much you should put in the plan annually, how much you want to have by the time you decide to retire, how to best allocate your contributions, and general retirement knowledge, are all topics a fiduciary’s expertise is meant to help aid you in navigating. Here's some information that will help you get off on the right foot. 

Here is How Much You Should Put in Your 401k

What is a 401(k) Plan?

Just what is a 401(k) plan? It's a private, employer-sponsored, retirement savings plan that makes it possible to contribute funds each year, allows employer contributions, and determines how the funds will be invested. This type of personal retirement savings plan is different from a pension or a State Auto-IRA, in that you have more control over the investments that are made using the contributions. To that end, you receive statements on a regular quarterly basis that allow you to see how your investment choices are performing.


Typically, plans of this type provide the opportunity to drop certain investment options, change the percentage of your funding that goes toward other fund options, and participate in different investment options. Your quarterly report will inform and present the various data in a succinct and digestible manner, and how your investments are paying off at present. 

What is a 401(k) Plan?

Different Types of 401(k) Plans

There are several different types of 401(k) plans. Typically, employers choose plans based on their organization's structure, that they think will be in the best interests of their employees. The primary types are as follows:


Traditional 401(k) plans: provide the chance to choose the investments from a pool of provided choices. All contributions you make, plus any earnings from the investments, grow tax deferred. Instead, you will pay taxes on the money when you withdraw it from the plan. Traditional 401(k) plans allow for specialized, configurable solutions, tailored to your company’s specific needs.


Safe Harbor 401(k) plans: like a traditional 401(k) this kind of plan allows for tax-deferred asset growth, but requires that employers contribute to their balances as well as individual employees. This can be done using non-elective contributions or matching funds contributed by the employee during the same annual period.


SIMPLE 401(k) plans: allow employees to defer some of the compensation. Employers are required to make up to a 2% non-elective contribution of an eligible employee's pay, or 3% matching contribution of the employee's pay. This is a dated 401(k) archetype, as all employees must participate, and there is very little customization.


It literally pays to know what your responsibilities are, how the funds can be directed on your behalf, and how you can check on the status of your plan from time to time. 

The General Recommendation for Annual Plan Contributions

How will you decide the amount to contribute during any annual period? The most common approach is to contribute a portion of one’s salary or wages that you earn during the course of the year, and/ or meeting your 401(k) required minimum contributions. Maximum contribution rates have been raised for the 2023/ 2024 tax year, so at most if you are under the age of 60, you may make up to $22,500 in contributions. Otherwise, you should strive to contribute a certain percentage of your annual income to stay on track for retirement.


Many financial advisors recommend going for somewhere between 10% and 15% of your annual gross income. This is considered a reasonable amount that most people can manage without creating any financial hardship. While you may not be able to manage this much immediately, it's a good idea to do as much as possible, and set these percentages as your eventual goal. 

What About Annual Limits

What About Annual Limits?

As experts with financial planning services will point out, it pays to contribute as much to a 401(k) as you can. Even so, there are limits to how much an individual can contribute to a plan during each calendar year. Being aware of those limits will help you make better decisions about how to manage the account. 


For the calendar year of 2022, individuals who were under the age of 50 at the beginning of the year were allowed to contribute up to $20,500 USD, in 2023 the federal government raised the maximum limit to $22,500 USD. Employees over the age of 50 were allowed to contribute a maximum of $27,000 USD over the course of the year. Since the schedule for allowed contributions is subject to change from one year to the next, it makes sense to check with a professional and find out what, if anything, has changed for the upcoming year. 

Do Employers Match Employee Contributions?

With some forms of 401(k) plans, employers are required to contribute some sort of matching amount over the course of the year. Others don't require any matching contributions at all. You can find out which applies in your case by talking with whomever manages the plan for your employer. 


When employers are required to provide matching contributions, it's usually a percentage of the employee's pay. That percentage may vary, depending on the current policies put in place by the IRS. The matching funds may be based on how much you contribute, or it may be a fixed percentage of the amount you earned during the year. 

Do Employers Match Employee Contributions

How About Independent Contractors and Small Business Owners?

More people are working for themselves than at any time in recent decades. If you happen to be an independent contractor, it's good to know that you can set up what's called a solo 401(k) and make regular contributions to it. Since you are the only one who is providing contributions, the annual limits for this type of 401(k) are higher than those provided through employers. 


For your solo 401(k) in the calendar year 2022, it was possible to contribute as much as $61,000 USD. That figure does not include what are known as catch-up contributions that will be applied to previous years. 


Small business owners can generally make use of the more typical forms of 401(k) plans. Your small business 401(k) may be structured as a traditional, a safe harbor, or a SIMPLE retirement plan. A financial specialist can help you weigh the options in light of your business model and current amount of resources on hand. You can also get some ideas by looking at what your direct competitors provide in the way of small business 401(k) plans for their employees. 

Is It Ever Too Late to Set Up a 401(k)?

The short answer is no; but the sooner the better. As long as you remain part of the workforce, there is nothing to prevent you from seeking out some sort of 401(k) plan and opening it. Despite what some people think, age is not a factor. 


The type of 401(k) plan you can set up will vary, based on your circumstances. If you recently retired from a company and now freelance, a solo 401(k) is for you. Should you decide to go to work for another company, and work enough hours to qualify for participation, there's no reason why you can't resume making contributions. 


In order to determine what applies in your case, it pays to seek out a retirement planning consultant who can take a close look at your specific circumstances. Together, it won't be hard to decide what will work best. 

Is It Ever Too Late to Set Up a 401(k)

Life Events That May Impact Your Contributions

While you may know the maximum amount that you can contribute annually to your 401(k) retirement plan, life sometimes gets in the way of reaching that amount. This is true even when you're great with money management, and have never been late with a debt in your life. Here are some examples of why you may not be able to meet your usual contribution in a given year:


  • Decrease in pay
    Perhaps you were demoted or there was a cut in pay for some reason. Since your contributions were based on the fact that you were earning a certain amount, it's necessary to adjust this figure as well as make other changes in your budget.

  • Job loss
    It wasn't a reduction in pay that included keeping the job. Instead, you are no longer with the company. That could be due to the company closing or because you were laid off or terminated. In any case, you will likely be watching your money closely until you have another position. When you find it, roll your 401(k) balance into a new plan as quickly as possible.

  • Medical events
    A major medical emergency led to you being out of work for some time. It also led to the accumulation of medical debt above and beyond what your insurance paid. It's not unreasonable for you to reduce 401(k) plan contributions until that debt is settled.

  • Alternative emergency arises
    Not all emergencies are medically related. If something happens, and you need to focus on resolving it, suspending contributions for now may be part of the strategy. Remember that you only want to do this if the situation is a true emergency, and you see no reasonable alternative. 

Getting Help With Setting Up and Funding a 401(k) Plan

So what are financial planning services and how do they relate to setting up a 401(k) plan? This type of service can go over your financial affairs, identify the type of 401(k) that works best for you, and help you figure out what to do in terms of funding. 


For example, an expert with a financial planning company can look over the budget of an independent contractor, identify how to structure it to create funds that can be directed into the 401(k), and help you develop a workable schedule. For people who participate in 401(k) plans provided by employers, they can help you set up a budget that allows you to contribute a reasonable amount while still managing to meet your other obligations. 


No matter who you happen to be, there are solutions for 401(k) plans that will work in your case. Contact a professional today and get started. Doing so will make a big difference in the degree of financial security that you enjoy later in life. 

© 2023 Prosper Retirement Partners, LLC
Principal Offices: California, Texas and New York