How much should I contribute to my 401(k) to retire?

Over a third (34.6%) of working-age Americans have a 401(k), making them the most-owned retirement account by far, and for good reason. They boast high contribution limits, tax advantages, and potential employer-match benefits. 

But how do you know how much you should contribute to a 401(k)?

Start by understanding your employer match benefits, like if your employer matches up to 5% of your salary. Then contribute at least that much each year.

After that, contributing 10%-15% of your salary to tax-advantaged retirement accounts of any type is a good rule of thumb. The types of retirement accounts you open and how much you contribute to each depends on your personal goals and financial circumstances. But, some key guidelines can help you nail your investment strategy. 

Why you should contribute to a tax-advantaged 401(k) 

Contributions to a traditional 401(k) retirement account are tax-deferred, so you invest pre-tax income, the account grows tax-free, and then you pay income taxes when you withdraw money from the account. 

Contributing pre-tax income means that money isn’t included in your annual taxable income, which leads to a  lower tax bill. 

These investments compound each year, tax-free, so the earlier you start investing, the larger your returns will be. 

For example, if you contribute $12,000 a year and average 4.9% annual returns, you’ll have $257,002 in 15 years. That’s over $77,000 in returns on your total $180,000 in contributions. 

And if you can build a large enough balance for compound returns to match your retirement income needs, you might even be able to live off interest alone. 

Maximum 401k contributions

First, you should know that the most you can contribute to a 401(k) in 2024 is $23,000, plus a $7,500 catch-up contribution for those over 50 years old. 

The total annual IRS contribution limit to retirement accounts, including employee and employer contributions, is $69,000. 

Maximizing your retirement contributions, particularly early in your career, may not be realistic while balancing your other living expenses. We’ll explore a few principles to help you decide how much to contribute to your 401(k). 

Employer-match contributions

Your first 401(k) contribution goal is to meet your employer-match contribution maximum. It’s free money and part of your compensation, so there’s no reason to leave it behind. 

Matching contributions are determined by your employer, so chat with HR if you’re not sure if or how much your employer matches. A 4% to 6% salary match is pretty good, and the median value of matching contributions was 4% in 2023, according to Vanguard. 

Of course, how the match is calculated varies. 

• Single-tier formula: Employer pays a percentage on the dollar contributed, up to a percentage of salary.
• Multi-tier formula: Employer 100% matches your contributions up to an initial percentage of salary (E.g., 3%), then partially matches each contribution up to the total salary limit (Ex. 4-6%).
• Dollar match: Employer pays a maximum dollar-amount matching contribution in addition to the tiered formula. 
• Variable match: Plans vary based on personal details like age and tenure. 

Single-tier matches are the most common (for Vanguard accounts, at least), so you’ll want to understand how they’re calculated. 

Let’s say you earn a $100,000 salary plus a single-tier matching benefit of 50%, up to 5% of your salary. If you max that benefit and contribute $5,000 a year, your employer will add $2,500 to your 401(k) each year. 

Over 15 years, that $37,500 in employer contributions grows to $58,836 with compound interest (assuming a 4.9% annual return rate). That’s a significant chunk of change you don’t want to miss out on by under-contributing and forfeiting matching benefits. 

Aim for 10%+ salary deferral

Depending on the expert you talk to, contributing 10% to 15% of your annual salary for retirement goals is a good place to start. 

Or begin with whatever’s comfortable for you now. If you can’t quite reach 10%, aim to increase contributions by at least 1% a year until you get there. Continuing to increase your contribution percentage as your salary increases is a wise choice. If possible, aim to save enough that you reach your 401(k) contribution limit. 

Of course, this 10% guideline is for total contributions to all of your tax-advantaged retirement accounts, not necessarily to your 401(k) alone. Once you’re maxing out your employer match, start considering other retirement accounts. 

Individual retirement account (IRA) for deductions

IRAs are personal accounts to which you can contribute any earned income (salary, tips, other wages). Traditional accounts enjoy tax-deferred growth, and contributions can reduce your taxable income, with some exceptions. 

Your 401(k) contributions might invalidate or decrease IRA tax deduction eligibility, depending on your modified adjusted gross income (MAGI). This also applies if your spouse contributes to a 401(k) and you don’t. 

You can compare your MAGI to the chart below to see if you qualify for IRA tax deductions.

If you qualify for a tax deduction regardless of your 401(k) status, you should consider opening an IRA. 

Tax deductions reduce your annual taxable income, which means less tax liabilities and more cash to contribute to retirement or other goals. 

Consider IRA investment opportunities and fees, too. IRAs typically have more investment options and flexibility, so you can better manage your investment strategy based on your risk tolerance and retirement goals. 

Smaller employers might also have high 401(k) fees, which you can avoid by contributing to an IRA instead. However, they have much lower annual contribution limits than 401(k)s.

Tax-free Roth accounts

401(k)s and IRAs both have Roth versions, which are tax-free retirement vehicles. You contribute after-tax income, so you’ve already paid Uncle Sam your dues. The account grows tax-free, and you can withdraw without owing any income taxes. 

These are ideal if you’re in a relatively low tax bracket now and expect your income to increase in the future. This way, you’re paying taxes with a lower tax rate now and enjoying tax-free growth.

You can also maximize your contributions with a mega backdoor Roth account. This method allows you to contribute to an employer-sponsored traditional 401(k) first to enjoy the employer-match benefits. Then, you can roll that amount over into a Roth account.

This increases your Roth contribution limits up to $46,000 in 2024, minus any employer contributions. 

Good to know: Not everyone is eligible for a mega backdoor Roth conversion and it can be tricky to do without penalties. Talk to a financial advisor if you want to increase your Roth contributions. 

Catch up on contributions

Your investment strategy naturally changes over time, and switching to larger contributions with less risk as you age helps protect your investment as you get closer to retirement. 

At age 50, your annual contribution limits increase thanks to catch-up contributions. These limits vary by account and change year-to-year with the cost of living, so check with the IRS each year as you budget your retirement strategy. 

Catch-up contributions can help you close the gap if you’re falling behind on your savings goal. 

Even if you’re on track, the extra contributions are a good way to safeguard against outliving your savings or high inflation rates affecting your retirement lifestyle. 

The Playbook take: Don’t pass on free money and tax advantages

Your 401(k) is an accessible and easy way to start saving for retirement. You own the account forever and can transfer it when you change jobs and continue to earn tax-free growth. You should also take advantage of employer-match benefits and contribute at least as much as you need to maximize employer contributions. 

However, you can split the 10% to 15% recommended annual retirement savings across tax-advantaged accounts, like an IRA that may also offer annual tax deductions for your contributions but has more investment choices than a 401(k). Learn more about strategies to reduce your tax liabilities. 

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