When you sign up for your company 401(k) plan, you will need to determine what percentage of your paycheck will be placed into your 401(k) account each pay period. This is called the “deferral rate.”
The average employee contributes 6-7% of their salary to a 401(k) plan.
The federal government places limits on how much you can contribute to your 401(k). The limits change every year to track inflation.
- In 2015 you can contribute up to $18,000. If you’re 50 or older, you can contribute an additional $5,500 (called a “catch-up contribution”), for a total of $24,000.
It’s up to your own financial situation to determine how much you contribute. Some financial experts advise that a contribution of at least 10% is necessary to build a healthy nest egg for retirement. If you’re over 40 and behind in saving, you’ll want to sock away 15% or more.
In general you should contribute as much as you possibly can to your 401(k), and “max out” your 401(k) (put in the maximum amount allowed yearly) before contributing to other types of savings plans. This allows you to take full advantage of the 401(k)’s tax benefits and employer match. You should always contribute at least enough to qualify for your employer’s maximum matching contribution. *