Maximizing Your 401(k): How Much Should You Contribute?
One of the most common financial planning questions is: How much should I contribute to my employer’s 401(k)? While the exact answer depends on your financial situation, there are key strategies to ensure you’re making the most of your retirement savings.
Start with Your Employer’s Match
Many employers offer a 401(k) matching contribution, where they contribute a percentage of your salary to your retirement account based on what your contribution. For example, if your employer matches dollar-for-dollar up to 5% of your salary, and you contribute 5%, you effectively double your savings to 10% of your income.
Key takeaway: Always contribute at least enough to get the full employer match—it’s essentially free money!
Aim for the 15% Rule
A common guideline for retirement savings is to contribute at least 15% of your pre-tax income. This includes both your contributions and any employer match. While 15% may seem like a lot, starting early and increasing contributions over time can make it more manageable.
Why 15%?
Helps build a strong retirement fund
Allows for growth through compounding
Provides flexibility for unforeseen financial needs in retirement
Keep Contribution Limits in Mind
The IRS sets annual contribution limits for 401(k) plans, and these limits can change from year to year. For 2025, the limits are:
Under age 50: $23,500
Age 50 & older: $31,000 (includes catch-up contributions)
While maxing out your contributions may not be realistic for everyone, these limits are important to keep in mind, especially during your peak earning years.
Traditional vs. Roth 401(k): Which is Right for You?
When contributing to a 401(k), you’ll typically have the option to choose between Traditional and Roth deferrals:
Traditional 401(k):
Contributions are made pre-tax, reducing your taxable income for the year
Withdrawals in retirement are taxed as ordinary income
Required Minimum Distributions (RMDs) apply
Roth 401(k):
Contributions are made after-tax
Withdrawals in retirement are tax-free, as long as certain conditions are met
No RMDs, offering more flexibility
If you’re looking for an immediate tax deduction, Traditional 401(k) contributions may be the better option. If you want tax-free income in retirement and anticipate being in a higher tax bracket later, a Roth 401(k) may be more beneficial.
The Bottom Line
Saving for retirement requires a balance of taking advantage of employer benefits, contributing consistently, and understanding tax implications. Whether you’re just getting started or optimizing your existing contributions, keeping these strategies in mind will set you up for long-term financial security.
The information provided in this blog is for informational and educational purposes only and should not be considered investment advice. Whitener Capital Management is a Registered Investment Advisory firm. All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial professional to assess your specific financial situation and objectives.
