Here’s How Much You Should Contribute to a 401(k), According to Experts

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Who doesn’t like free money?

A 401(k) is a retirement savings account offered by an employer and funded by a percentage of your paycheck that’s automatically withdrawn every month. When a company matches employee 401(k) contributions, it is essentially giving you free money and an incentive to save for retirement. 

But how much do you actually need to contribute to maximize 401(k) benefits?

Fidelity, a popular digital investment platform, recommends putting away 15% of your income using a 401(k) account each year toward retirement, including any matching contributions from your employer. Many Americans still face unemployment challenges, so we acknowledge these figures aren’t realistic for everyone. 

But for those employed and with access to a 401(k), it’s a good idea to understand the benefits a 401(k) can provide for retirement — especially if your employer is matching a portion of your contributions. 

401(k) Company Matching, AKA Free Money

Because many companies offer their employees a dollar-to-dollar match on 401(k) contributions up to a certain amount, many employees choose to max out their 401(k) contributions for the year first, then contribute to another retirement account, such as an IRA. “At a minimum, you should aim to contribute enough to take full advantage of your employer match, if they offer one,” says Jason Dall’Acqua, a CFP and president of Crest Wealth Advisors LLC. . 

Pro Tip

Even if you can only spare a little each month, start contributing to a retirement savings account as soon as you can.

An employer 401(k) match incentive is when your employer will match up to a certain percentage of your contributions. Company matching can be set up in different ways, but here is one example:

  • An employer offers a 100% match on your first 3% of yearly contributions.
  • If you contribute at least 3% of their income and the employer matches another 3%, this gives you a 6% contribution rate (of your income) into your 401(k). 
  • If your annual salary is $50,000, and you use the 3%  company match all year, you are contributing $3,000 to your 401(k) a year. Only $1,500 of that is your money. 

“Your employer match is essentially free money and will go a long way in enhancing your retirement savings,” says Dall’Acqua. This is a major reason why starting early is a key strategy to retirement. 

Reach out to your company’s human resources or benefits team to find out if you are missing out on employer matching. 

401(k) Contribution Limits

Young investors might not know that 401(k)s have annual contribution limits. Even with an employer match, you can only invest so much money every year before maxing out. 

The contribution limits are set by the IRS every year. 401(k) participants 50 years or older are generally eligible to contribute a higher amount than those under 50 years of age. IRAs, another type of popular retirement savings account that isn’t tied to employment, also have their own contribution limits.

Below are 2021 contribution limits for 401(k) and IRA retirement accounts. Note the contribution limits for IRAs are significantly lower than the 401(k) limits. 

2021 Contribution Limits401(k)IRA
Participants under 50$19,500$6,000
Participants 50 and older$26,000$7,000

“If you are able to comfortably max out your 401(k) contributions given your income level and expenses, then go for it,” says Dall’Acqua. “Doing so will only enhance your long-term retirement planning.” Maxing out yearly contributions comes with caveats, though. “Don’t put yourself in a financial bind where you do not have access to any non-retirement funds such as emergency savings,” Dall’Acqua says.

How Much Will You Need In Retirement?

The sum you’ll need to retire is a highly personal question but needs careful consideration. 

“I believe retirement is a financial number versus a retirement age. Assess how much you need in your retirement account to live at least 20 years in retirement without having to go back to work to pay your bills,” says Shaquana Watson-Harkness, personal finance coach and founder of Dollars Makes Cents, an online debt management and investing training course.

Rita-Soledad Fernández Paulino, a NextAdvisor contributor and creator of Wealth Para Todos, told us how she calculates her financial independence number using Trinity Study’s 4% rule. According to the 4% rule, you can estimate how much money you’ll need to live on during retirement using this quick calculation:

Annual Expenses x 25 = Nest Egg (estimated sum for retirement). 

For example, if your annual expenses are $40,000, multiply that by 25 for a total of $1M — the amount you’d need to retire, based on the 4% rule above.

If you’re already freezing up thinking about million-dollar sums, remember you’re not solely responsible for saving up this much on your own. The market, through compound interest, will do most of the heavy lifting for you, especially if you invest early and let your portfolio grow for decades. 

That’s why starting early is so important. 

When Is an IRA a Better Option?

An IRA and a 401(k) are both retirement saving vehicles and the two share commonalities. But there are a few important differences that make IRAs the better choice in some situations. 

A 401(k) is only available through your employer. If you work at a company that doesn’t offer a 401(k), you can’t get one. People in work situations where the employer does not offer 401(k) accounts can still get retirement savings accounts with tax benefits — that’s where the IRAs come in. 

IRAs are another type of retirement savings account. Unlike a 401(k), an IRA is not tied to your employer. You can sign up for an IRA at  online brokerage like E*Trade, Vanguard, or Fidelity and open an account. 

Another reason why someone might choose an IRA is for the investment options. IRAs are generally known to have a wider selection of investment opportunities than what you’ll find with a 401(k). But keep in mind that the contribution limits with an IRA account is much lower than the limits with a 401(k).

Tax Implications: 401(k) vs. IRA

When planning your retirement, taxes should be part of the equation. 


  • Contributions are not included in taxable income — helping to reduce your annual tax burden. 
  • Company matching encourages employees to save for retirement.
  • Money you contribute is tax-deferred, which means you don’t have to pay income tax on the dollars you put in. Instead, you’ll pay taxes when you withdraw. 

Traditional IRAs 

  • Tax-deferred, so you can invest a larger portion of your income when you contribute to retirement, but you’ll pay taxes later.

Roth IRA

  • Different from both a 401(k) and a traditional IRA when it comes to taxes. 
  • You contribute to the account with money after taxes. 
  • The amount you can invest upfront is smaller, due to the taxes paid, but you can withdraw your money and profit tax-free.  

Keep in mind that 401(k)’s, Roth IRAs, and Traditional IRAs are designed for people to withdraw from in their retirement years. While you can withdraw from retirement accounts early, you might get penalized. 

For example, withdrawing funds prior to 59 ½ will get a 10% penalty plus your income tax rate, says Watson-Harkness. There are expectations to the rules, says Watson-Harkness, such as a first-time home purchase.

It’s best to contribute often and early to give your retirement savings accounts time to grow over the course of your career. But even if today is the first time you‘ve thought about saving for retirement — it’s never too late to start. 
Check out NextAdvisor’s library of retirement resources for more information.