- Many financial experts suggest saving approximately 15% of your income to a 401(K) plan or a combination of retirement accounts
- Ultimately, the amount you should contribute will depend on a variety of personal factors. Strive to strike a balance between your long- and short-term financial goals.
- Deferring taxes and employer matching can make a 401(K) plan very advantageous over other types of investments.
Planning for retirement can be a challenging task. Between rules about taxes and knowing which investments to choose, there are a lot of factors to consider.
One of those questions is "How much should I contribute to my 401(K)?" When thinking about how to maximize your nest egg, it may be natural to assume you should save as much as possible. However, this amount should also be practical and not compromise your other financial goals. For these reasons, you should consider the following points when making your decision.
Understanding 401(K) Contributions
Before you can determine how much to save to your 401(K), it’s helpful to first understand what contributing to the plan means and how it may affect your financial future.
The Basics of 401(K) Plans
The benefit of using a 401(K) over other types of investment accounts is its tax advantages. A traditional plan works as follows:
- Contributions are taken out of your paycheck pre-tax (i.e. before taxes are collected).
- Your savings get invested and grow tax-deferred, meaning you won't pay any taxes on your earnings as long as the money stays inside the 401(K).
- After age 59-1/2, you can begin taking withdrawals. Any money taken out will then be subject to ordinary income taxes.[1]
Because you get to delay paying taxes on your contributions and earnings, you may effectively contribute more with a 401(K) than if you had used a regular, taxable account. This may help you to better grow your nest egg and be financially prepared to retire.
Contribution Limits
As of 2025, the IRS allows 401(K) participants to contribute up to $23,500 each year. If you’re age 50 or older, then you’re also allowed to make an additional “catch-up” contribution of up to $7,500, bringing the total upper limit to $31,000.[2]
Note that if you’re married and both have a 401(K), then these limits apply to each individual. In other words, the two of you could contribute a combined total of $47,000 or $62,000 if you're 50 and older.
How Much Should I Contribute to My 401(K)?
The amount you should be saving for retirement is a personal choice. You’ll want to base it on a variety of factors, such as your short- and long-term goals. If you’re married or in a committed relationship, then they should also be included in the conversation.
In general, most financial experts suggest saving 15% of your income annually for retirement. This can be to a 401(K) plan or a combination of retirement accounts (such as an IRA).[3]
The Importance of Starting Early
Aside from building a bigger nest egg, there may be some strategic advantages to contributing to your 401(K) as soon as possible.
For starters, you may have better chances of developing good savings habits. The earlier you begin, the more likely you may be to adapt your budget to your after-tax paycheck. That may help prevent lifestyle creep — a phenomenon where you unknowingly spend more money as your income grows.[4]
Starting 401(K) contributions sooner than later may also give them the best chances of growth thanks to the power of compound interest. This is when money grows on top of both the money you've contributed and any previous earnings. Compound interest is why an investment account can grow several times over and eventually exceed your contributions. Therefore, the earlier you start, the better your chances of increasing your net worth.
Employer Matching
Another important factor that can influence how much you may choose to save to your 401(K) plan is something called employer matching contributions. This is when the organization you work for offers to put money into your retirement account alongside your contributions. Essentially, it's free money you can collect just for being a good saver.
How Does Employer Matching Work?
Every employer is free to structure their 401(K) matching contributions however they wish. The simplest arrangement is a one-for-one ratio where they contribute one dollar for each dollar you save (typically up to some maximum limit).
Other employers choose to have multi-layered arrangements, where they may match one dollar up to a certain amount followed by 50 cents up to another limit. Every company is free to set the rules as it sees fit.
How To Maximize Employer Matching
When matching contributions are available, it’s in your best interest to structure your contributions to maximize your employer match. To help make this happen, do the following:
- Understand the rules. Contact your company's plan administrator and learn the details of their specific employer-matching payment structure.
- Calculate the maximum potential. Determine how much you'd need to save each paycheck to qualify for the highest amount possible.
- Contribute at or above this amount. Adjust your contribution rate to ensure that you're earning the maximum match available.
How to Increase Your 401(K) Contributions
If you’re not saving as much for retirement as you’d like to be, the good news is that you can always make changes at a later time.
An easy way to systematically increase your contributions is to act when you get a pay raise or change jobs. The way this works is as follows:
- Each time you get a bump in pay, calculate the difference between your old and new pay.
- Determine how much of this amount you’d like to defer to your 401(K).
- Distribute this figure over the amount you were previously saving by increasing your contribution rate correspondingly.
Repeat this process with each new pay increase, and after a few years, you may be putting considerably more into your 401(K).
Balancing Financial Goals
While saving for retirement is certainly important, it's probably not the only financial goal you have. You might also wish to:
- Pay off debt like student loans or high-interest credit cards
- Purchase a vehicle
- Save up for a down payment on a house
- Support your family
For these reasons, it’s important that you consider how contributing to a 401(K) might influence your other financial priorities. Ideally, you may want to attempt to strike a balance by dividing your resources among each of your goals.
Final Thought
There's no one answer for how much you should put in your 401(K). The exact amount will vary from person-to-person.
However, the best approach is to consider your financial needs and future goals. Being able to defer taxes and get employer matching can be a nice advantage, but at the same, don't set your contributions so high that it prevents you from living your life in the present.
Find a balance between the two and then determine a contribution amount you feel comfortable making.
