How much should I contribute to my 401(k)?
At minimum, contribute enough to capture your full employer match — that is a 50–100% instant return on your money that no investment can reliably beat. If your employer matches 50% up to 6% of salary, contribute at least 6%. Beyond the match, a common target is 15% of gross income toward retirement (including the employer contribution). The 2024 IRS 401(k) contribution limit is $23,000 for employees ($30,500 if age 50+). Maxing out your 401(k) is one of the most powerful wealth-building actions available to US workers.
What is an employer 401(k) match and how does it work?
An employer match is free money your employer adds to your 401(k) based on your contributions. Common structures: "50% match up to 6% of salary" — your employer adds $0.50 for every $1 you contribute, up to 6% of your salary. On a $75,000 salary with this match, contributing 6% ($4,500) earns $2,250 in employer contributions. "100% match up to 4%" — dollar-for-dollar on the first 4%. Note: vesting schedules may require you to stay employed for 1–6 years before you own the matched funds. Always check your plan's vesting schedule before leaving a job.
What is the difference between a traditional 401(k) and a Roth 401(k)?
Traditional 401(k): contributions are pre-tax (reduce your taxable income now), investments grow tax-deferred, withdrawals in retirement are taxed as ordinary income. Best when you expect to be in a lower tax bracket in retirement. Roth 401(k): contributions are after-tax (no current tax break), investments grow tax-free, qualified withdrawals in retirement are completely tax-free. Best when you expect to be in the same or higher tax bracket in retirement, or for young workers in low tax brackets. Many financial advisors recommend splitting contributions between both for tax diversification in retirement.
How much will my 401(k) grow over time?
Growth depends on contribution amount, employer match, investment returns, and time. Example: starting at age 30 with $10,000 balance, contributing $500/month, receiving a $200/month employer match, at 7% annual return to age 65: FV = roughly $1,180,000. The same scenario starting at age 25: roughly $1,680,000 — 5 extra years adds $500,000. The most important levers: starting early (time is the most powerful), maximizing the employer match (free money), and investing in diversified low-cost index funds rather than high-fee actively managed funds.
What happens to my 401(k) if I leave my job?
Your options when leaving a job with a 401(k): (1) Roll over to your new employer's 401(k) — simple, keeps all funds in one place. (2) Roll over to an IRA — more investment options and usually lower fees; recommended by most financial advisors. (3) Leave it with your former employer — allowed if the balance is over $5,000, but you lose the ability to contribute. (4) Cash it out — strongly discouraged: you pay income tax plus a 10% early withdrawal penalty (if under 59½), losing 30–40% of the balance immediately. Always do a direct rollover to avoid taxes and penalties.
What should I invest my 401(k) in?
For most workers, a target-date fund (e.g., "Target 2055 Fund" if you retire around 2055) is the simplest and often the best choice — it automatically rebalances from stocks to bonds as you approach retirement. If you prefer to build your own allocation, the standard guidance: young workers (20s–30s) should be 90–100% in diversified stock index funds (S&P 500 index, total market index). As you approach retirement, gradually shift to 60–80% stocks, 20–40% bonds. Avoid high-fee actively managed funds — a 1% annual fee difference costs an estimated $100,000+ over a 30-year 401(k) career on a $200,000 portfolio.
When can I withdraw from my 401(k) without penalty?
You can take penalty-free withdrawals from a 401(k) starting at age 59½. Early withdrawals (before 59½) incur a 10% penalty plus ordinary income tax unless an exception applies: you separated from service at age 55 or older (the "Rule of 55"), disability, certain medical expenses exceeding 7.5% of AGI, substantially equal periodic payments (72(t)), or qualified domestic relations order (divorce). Required Minimum Distributions (RMDs) must begin at age 73. Roth 401(k) contributions (not earnings) can be withdrawn anytime tax and penalty-free.
Is a 401(k) better than an IRA?
401(k) advantages: higher contribution limit ($23,000 vs $7,000 for IRA in 2024), employer match (free money not available in an IRA), payroll deduction simplicity, creditor protection under ERISA. IRA advantages: more investment options (any brokerage vs. your employer's plan options), often lower fees, Roth IRA has no RMDs. Recommended order: (1) 401(k) up to full employer match, (2) max Roth IRA ($7,000), (3) return to 401(k) up to the $23,000 limit, (4) taxable brokerage account. If your 401(k) has poor investment options or high fees, prioritize the IRA after capturing the match.