How Much Should I Contribute to a 401(k)?

401(k), Investing, Retirement Planning
contribute 401(k)

Some questions have an easy answer and a hard answer. “How much should I contribute to my 401(k)?” is one of them.

The easy answer: Contribute at least enough to earn all of the matching dollars that your employer offers. The vast majority of companies that offer a 401(k) also match employee contributions to that plan, up to a percentage of your salary.

That match may vary from relatively small (50% of contributions, up to 3% of your salary) to extremely generous (100%, up to 6%), but at either end of the spectrum 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.

First, know how much you can contribute

In 2017, the 401(k) contribution limit is $18,000; it increases to $24,000 if you’re 50 or older. Employer contributions are on top of that limit.

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.

Your retirement needs

If you contributed $18,000 to a 401(k) each year for 35 years and got a 6% average annual return, you’d have around $2.15 million. If your employer matched contributions, that would add to the tally.

But $18,000 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 by running the numbers with a retirement calculator.

If you need to start at a lower contribution and work your way up, that’s fine — again, aim to at least contribute enough to grab the match, then bump the percent you contribute up by 1% or 2% each year.

Your 401(k) fees

Like the amount of an employer match, 401(k) plan fees and investment selections can vary widely. In some plans, the company pays administrative expenses — the cost of accounting, record keeping and day-to-day management — on behalf of the employees. In others, the company passes those fees on to plan participants, who each pay a flat fee or a percentage of the assets they’ve invested in the plan.

Some 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 individual retirement account 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 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.

» MORE: NerdWallet’s 401(k) fee analyzer

If the fees are high, direct additional dollars over the match to a traditional or Roth IRA. (If there is no match, start with the IRA.) The IRA contribution limit is much lower at $5,500 a year — $6,500 for those 50 or older — so if you max that out and you need to continue saving, go back to the 401(k).

Your future taxes

With a traditional 401(k), the most common offering, 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) — and many don’t, though it’s becoming more common — 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.

Again, if you max out that Roth IRA and need to continue saving, go back to the 401(k) and continue contributions there.

Not sure if you’re eligible for a Roth IRA? Here are the Roth IRA income limits for 2017.

» MORE: Should you contribute to a 401(k) or an IRA?

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @arioshea.