The less painful it is to save for retirement, the better. When you contribute part of your paycheck to your 401(k), you’re making an important investment in your future. You also receive tax benefits, so it benefits you in the present. As your circumstances change, you may want to make changes to how much you contribute to your 401(k). If you get a raise, for example, you may want to increase your contribution. If you’re experiencing a financial crunch, you may want to temporarily lower your contribution. In most cases, in order to change your 401(k) contribution, you will need to contact the company’s 401(k) plan provider.
Understanding Your 401(k)
A 401(k) is an employer-sponsored retirement plan. You can choose to contribute a percentage of your earnings, which is taken out before taxes are calculated. This benefits you because that lowers the amount of income reported to the IRS, which lowers your income taxes. You don’t pay taxes on the money in your 401(k) until you take it out during retirement. The amount of money you contribute to a 401(k) does count toward your Medicare and Social Security payments, though.
Contributing to Your 401(k)
Your employer determines how often you can change your 401(k) contribution. Some employers may let you change it only once per year, while others may let you change it as often as you like. Your company’s 401(k) plan provider can let you know how often you can change your contribution. If you aren’t sure of who your plan provider is, contact your company’s human resources department to obtain their contact information. You may be able to change your contribution through your plan provider’s website.
Your company may have a minimum or maximum contribution amount. The IRS also has a maximum contribution amount that increases annually. As of 2019, the maximum you can contribute to a 401(k) is $19,000 per year or your annual salary, whichever is less. If you are going to be age 50 or older this calendar year, you may be able to exceed the IRS maximum and make catch-up contributions if your employer allows it. You can make up to $6,000 per year in catch-up contributions as of 2019.
When you’re deciding how much to contribute to your 401(k), one important consideration is whether your company matches your contribution. Some companies will match the amount you put into your 401(k) up to a certain percentage. If your company matches up to 5 percent, for example, and you contribute 10 percent of your salary, your company adds 5 percent. If you contribute 3 percent and your company matches up to 5 percent, they will only match the 3 percent you contribute. They will not put more into your 401(k) than you do. If you’re uncertain about how much to contribute, consider putting in at least enough to take full advantage of your company’s 401(k) match.
Investing Your 401(k)
Once you start contributing to your 401(k), you’ll need to allocate your investment. Your options are determined by your employer and plan provider. Typically, you can choose from stocks, bonds and mutual funds. When you’re deciding how to invest your 401(k), you’ll need to consider your age and your risk tolerance. Many plan providers offer tools and advice to help you determine the best investments for your needs. You may also want to consult a financial adviser. You can also periodically change your investment choices, although how often you can do so is determined by your employer.
- Note that the maximum contribution to a 401(k) plan may increase; check to see what the latest limits are. As of time of publication, the maximum contribution allowed was $17,000 per year, or $22,500 for individuals 50 and older.
- Be aware that lowering the amount you contribute could have a drastic effect on your retirement balance. Always talk with a financial advisor or your human resources department to choose the contribution amount that fits your retirement goals.
Melinda Hill Sineriz is a freelance writer with over a decade of experience. Her work has appeared on Pocket Sense and Sapling. She specializes in business, personal finance, and career writing. She has worked in insurance sales and financial planning, helping families to manage their money and prepare for the future. Learn more about her and her work at thatmelinda.com.