How Much to Contribute to 401k Plans

by Neal Frankle, CFP ®

You might be confused over how much to contribute to 401k plans at work – or even if you should contribute or not. For now, let’s talk about the confusion over the amount to put in.  It is puzzling.  That’s because there are actually two sets of rules. The most important guidelines are set down by the IRS. But your employer also makes rules that should not be overlooked. Let’s first deal with the IRS and then we’ll talk about your employer.


The maximum amount you can contribute to your 401k in 2012 is $17,000. (403B and 457B plans also have the same $17,000 ceiling.)

If you are over 50, you may be able to take advantage of a catch-up provision which allows you to contribute another $5,500 into your 401K retirement plan. But this catch up provision is not mandatory. That means your employer doesn’t have to offer it and even if they do, you don’t have to take advantage of it. Check with HR to see if your employer offers this option.

If the IRS rules seem straight forward to you, that’s because they are. The tricky part comes when we talk about your employer’s rules.

Employer Rules

Your employer decides the maximum percentage of your salary that you can contribute to your 401k plan. Employers also decide what (if any) match they will provide. Let’s look at your salary percentage first.

For all the IRS cares, employers can allow employees to contribute up to 100% of their salary (up to the limit of $17,000) into a 401k plan. But you’ll never find an employer that does. What does happen is that the employer sets a percentage limit for everyone.

Let’s say your employer sets a 10% contribution cap to your 401k. That means if your gross salary is $75,000, the most you can contribute to that 401k plan at work is $7,500.

But Neal, I thought you said the limit is $17,000.

I did. But I also said that there are two sets of rules and you must adhere to your employer’s rules as well. Because the employer in this case set a 10% maximum contribution limit, you won’t be able to get to the $17,000 IRS limit unless your salary is $170,000 or more. (Don’t worry if you want to sock away more for your retirement. There are ways to do this and I’ll tell you how to do so shortly.) For now, let’s move on and talk about “company matching”.

Often a company will contribute to your 401k as long as you do. This is their way to encourage you to contribute to the plan. In many cases, your employer will match every contribution you make up to a certain point. Let me illustrate by way of example.

Let’s say your employer matches 50% of your contributions up to the first 6% of your salary. Let’s also say that your employer has decided that the maximum percentage of salary that you can contribute is 10% as stated above. So, if you earn $75,000 you know that your maximum contribution is $7,500.

If your employer is going to match 50% of every contribution, the maximum match is going to be $2250. How did I get that number?

6% of $75,000 is $4500. That is the maximum contribution you can make that they will match. As long as you contribute at least that much they’ll throw in 50% of that – or $2250. But once you get to $4500 they are done. They won’t contribute beyond the $2250.

If you contribute up to your max of 10% of salary ($7,500), the total deposited into your 401k plan will be $9750. Pretty cool huh? Now all you have to do is make sure you invest your 401k funds well and you are golden.

What if you need to save more for your retirement?

Like anything, there is a solution to almost every financial problem if you are willing to do the work. And if you want to put aside more money for your retirement badly enough, there is plenty you can do. The best option is to start a profitable side business and fund a small business retirement plan. This is especially powerful if you have very modest income as an employee.

While there are overall contribution limitations, you’ll likely be able to sock away a significantly greater amount every year for your retirement if you have the side business. (Check with your tax professional on this. Your individual circumstances really impact what you can and can’t do with retirement plans as a self-employed person who is also an employee with a retirement plan.)

How much do you contribute to your 401k? How much of a match do you receive? Do you stop your contributions once the company match falls off? Do you think that’s the best way to go?


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{ 3 comments… read them below or add one }

Ken March 5, 2013 at 11:01 AM

My wife only makes 25k/year, but her employer recently took away bonuses and started 100% matching 401k contributions up to 3% or so. She was pissed, but it’s free money so I had her sign up to contribute the full 3% that will be matched 100%. She’s a spender and I’m a saver, so it’s difficult to get her on the same page sometimes.


William @ Drop Dead Money October 29, 2012 at 2:30 AM

Back when I was working, none of my employers had an upper limit. They were just too happy to have employees participate. My wife and I started late, and so we maxed out whatever we could, whenever we could. We were the only people at either of our jobs to be so fanatic about it, but today we’re very happy we were! :)


Neal Frankle October 29, 2012 at 2:47 AM

Thanks for sharing William. Hopefully your comments will encourage others to get going. Congrats to you and your wife!


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