How Much Can I Contribute to My 401k Plan at Work?

Choose your 401k asset allocation wisely.
i investments image by iMAGINE from <a href=''></a>

A well-funded retirement plan should be every employee’s goal. At the end of the day, it pays to know what those years of hard work would translate to in terms of security, financial stability and return on invested time and effort. As one grows older, one can’t be too wary of what lies ahead. The very essence of the 401k plan is to prepare for your retirement years. Maximize your benefits by putting the right amount towards your 401k plan.

Employer's Role

It is the employer’s responsibility to design, author and put up its own policy standards and implement guidelines for a 401k plan. Companies do not have a standard design for a retirement plan; however, for purposes of sustaining a realistic contribution schedule, individual employee contributions generally will not exceed 10 percent of his salary.

Maximum 401k Individual Contribution

In preparing for the future, you need to strike while the iron is hot. Never underestimate the power of saving for your twilight years while young. For 2010, if you are 49 years old or younger, the allowable maximum contribution you can make is $16,500 annually, provided you earn more than $16,500 a year. The law will not allow an employee contribution higher than the annual net income. You may add up to $5,500 to your contributions once you reach the age of 50, which many refer to as the “catch-up.” This allows you to grow your retirement funds at a respectable level if you have been procrastinating.

Asset Allocation

Select how you want your 401k distributed. Choose between bonds or stocks. In general, bonds are less aggressive than stocks, but they also do not gain as much value as stocks do. Bonds are less volatile than stocks. Since bonds do not make as much, you will tend not to lose as much either. In trying times, bonds may be a better option. Remember, however, that your 401k should cover your golden years; therefore, you need to build your portfolio’s equity in order for it to grow. The classic balanced portfolio -- 60 percent stocks, 30 percent bonds and 10 percent cash -- is a good starting point. You can beef up the stock exposure if you're young or aggressive, but stay on the conservative side by switching majority of your stocks to bonds, as you get closer to retirement.

Setting Aside 401k Contributions

Determine your monthly budget to know how much of your income you can allocate for your 401k. Set aside the amount you need to sustain yourself and pay for your bills. Live by the adage of paying yourself first before spending money on frivolous things. Cut down on your daily expenses as much as you can. For example, bring your lunch to work instead of eating out. Make your own coffee instead of buying coffee daily. Take public transportation or carpool to work instead of driving. Every penny counts towards your nest egg. If you expect to get a raise or bonus annually, try putting that amount towards your 401k plan. Think about it -- you’ve survived the past 12 months without the additional money, so if you put your raise towards your 401k, chances are, you will not miss it. At the very least, you can increase your contribution if you cannot put your entire bonus/raise towards your 401k.

the nest