There's an easy answer and a hard answer to the question of how much to contribute to a 401(k).
First things first, the easy answer: Contribute at least enough to earn all of the matching dollars that your employer offers. Whether that match is small or large, it amounts to free money. Our 401(k) calculator can help you see how much your contributions would add up to in retirement.
The hard answer comes in if your employer is one of the few that doesn’t offer a match or if you’re trying to decide if you should contribute more than you need to get the match.
How much can you contribute to a 401(k)?
In 2021, the most you can contribute to a 401(k) is $19,500; that limit increases to $26,000 if you’re 50 or older. Employer contributions are on top of that limit. These limits are set by the IRS and subject to adjustment each year.
That limit dictates how much you can contribute, but it doesn’t tell you how much you should contribute. To figure that out, consider the following.
Think about how much you'll need in retirement
If you contributed $19,500 to a 401(k) each year for 35 years and got a 6% average annual return, you’d have over $2.3 million. If your employer matched contributions, that would add to the tally.
But $19,500 a year is a lot of money — especially as an ongoing, year-after-year commitment. It may or may not be enough to fund your retirement, or it could be even more than you need. Your 401(k) contribution amount should be guided by your retirement savings goal.
How much money you'll need in retirement depends on when you plan to retire, how much of your current income you’d like to replace and how much you want to rely on Social Security.
Most experts recommend saving 10% to 15% of your income, but our suggestion is to get a more detailed goal from a retirement calculator.
If you need to start at a lower contribution and work your way up, that's fine. Aim to contribute at least enough to grab the match, then bump up the percent you contribute by 1% or 2% each year.
An IRA might be a better option
If you are already contributing up to your employer match, another way to invest additional cash is through a traditional or Roth individual retirement account. (And if you have no employer match, start with the IRA.) The IRA contribution limit is much lower — $6,000 a year; $7,000 for those 50 or older — so if you max that out but want to continue saving, go back to your 401(k).
Some 401(k) plans, typically at large companies, have access to investments with very low expense ratios. That means you’ll pay less through your 401(k) than you might through an IRA for the very same investment. In other cases, the opposite is true; small companies generally can’t negotiate for low-fee funds the way large companies may be able to. And because 401(k) plans offer a small selection of investments, you’re limited to what's available.
Let’s be clear: While fees are a bummer, matching dollars from your employer outweigh any fee you might be charged. But once you’ve contributed enough to earn the full match — or if you’re in a plan with no match at all — the decision of whether to continue contributions to your 401(k) is all about those fees. (Not sure how much you're paying? Check out our 401(k) fee analyzer.) If the fees are high, direct additional dollars over the match to a traditional or Roth IRA.
» Interested in IRAs? Explore our full list of the best IRA providers.
401(k), IRA, Roth: Know the tax impact
With a traditional 401(k), your contributions come out of your paycheck pretax, but distributions in retirement are taxed as income. That means your money grows tax-deferred.
With a Roth 401(k), your contributions are made after tax but distributions in retirement are tax-free — you never pay taxes on investment growth.
The difference between a Roth and traditional IRA is the same. If your employer doesn’t offer a Roth version of a 401(k), you may want to start contributing to a Roth IRA after you’ve achieved your 401(k) match, to build some of that tax-free income in retirement.
In general, money contributed to a Roth account is more valuable in retirement, because you’re not handing a portion of every distribution to the IRS.
If you max out that Roth IRA and need to continue saving, go back to the 401(k) and continue contributions there.