A Beginner’s Guide to Contributing to a 401(k)

Making contributions to your first 401k is both an exciting and intimidating process. Here’s what you need to know about contributing to a 401k.

What is a 401k?

Traditional and Roth 401ks are retirement savings accounts, most often offered through an employer.

Contributing to a 401k means you may deposit income, pre-tax if using a Traditional 401k and after-tax income for a Roth, into an account to let it accrue interest until you retire. You may even be able to split your contribution between Traditional and Roth 401k options through your employer.

What are the contribution limits?

Every year the federal government caps the amount you can contribute, and it can change year-to-year based on inflation.

As of 2015, the contribution limit went up to $18,000, plus an extra $6,000 if you’re over 50 years old. This means you would need to contribute $1,500 a month, or $750 per paycheck if you’re paid twice a month, in order to meet the maximum contribution limit.

How much should you contribute?

If you’re laughing out loud right now about how much you’re allowed to contribute, you’re not the only one. The maximum contribution limit can seem out of reach for many, that’s why making the decision of how much to contribute comes down to two main factors: 1) does your employer offer a match, and 2) your comfort level.

First off, if your employer offers a company match – meaning they’ll match a certain amount of your contributions – you need to at least contribute that percentage. If you don’t, you’re practically giving away free money.

Secondly, if your company doesn’t offer a match, it comes down to how much you feel comfortable subtracting from your paycheck. A good rule of thumb is contributing at least 5%.

When can I make a withdrawal?

You can start making withdrawals at age 59 ½ and the IRS requires minimum withdrawals starting at age 70 ½. You’ll be required to pay taxes on the amount of money you withdraw from your Traditional 401k. You won’t have to pay income taxes during retirement on a Roth 401k.

If you have to make a withdrawal before you reach this age, you’ll be charged a hefty penalty fee and you’ll be required to pay taxes on the amount you withdraw.

Should I diversify my retirement accounts?

Just because your company offers you the option of contributing to a 401k doesn’t mean you shouldn’t look into an alternative or options that supplement your 401k contributions.

Especially look into opening a Roth IRA to supplement your 401k if your company doesn’t offer a match.

What happens if I leave my job?

The money you contribute to your 401k is your money and will remain in the account. If you have an employer match, you’ll need to ask how long it takes the money to become vested.

Once the employer’s contribution is vested, the money is yours to take upon parting your job. If you leave before that time frame, you’ll either get a portion of the match or perhaps none at all.

What if I have questions?

Just ask! Making the most out of your money now will ensure you have a bright retirement future ahead. If you’re unsure of how to maximize your retirement savings accounts don’t be afraid to ask questions.

How are you maximizing your 401k account?