I don’t know about you but I don’t want to work forever; one day I would like to retire and focus solely on family, fun and other activities I want to spend my time doing. To successfully retire, you either need to win the lottery or put aside money and have it grow and repeat this for many years. Unfortunately winning the lottery is not a realistic plan, so you’ll have to start putting money away while you’re young. Did you know that experts recommend putting away at least 10 percent of your paycheck into retirement accounts like a 401(k)? In reality, though, the average worker under 50 doesn’t save this amount. The average young professional (according to that article) saves 7%. How much do you save?

There are a few different ways to save for retirement, but the most common is the 401(k) or an IRA. A 401(k) is something that’s offered through your employer, and may also come with a match (i.e free money). If you want to prepare well for retirement, it pays to maximize your 401(k) contributions. While other retirement accounts also do the trick, a 401(k) allows you to take advantage of any matching your employer offers (I’ll say it again – free money).

Read on to learn about the maximum 401(k) contribution for 2020 and tips for determining how much you should contribute.

What Are the Benefits of 401(k) Contribution?

When deciding where to put your money for retirement, you might wonder which benefits a 401(k) offers. First, your employer might match part of your contributions so that you can grow your nest egg sooner. At the same time, this type of account usually has low fees and doesn’t require a long vesting period. You also still get to choose from a variety of investment options. Even better, your employer will pull the money out of your paycheck, which makes things much easier and less for you to think about (or be tempted to spend).

There’s also a tax benefit. Your Traditional 401(k) (i.e. not Roth401(k)) contributions are excluded from your federal taxes in the year you make them. Instead, you’ll pay taxes when you withdraw the money later. This will lower your taxable income right now.

If you decide to leave your job, you’ll still have options to move your 401(k) money; leave it, or withdraw it (i.e. roll it over). You can learn more about such options from 2nd Opinion Partners. I’m a big fan of rolling it into my own personal IRA (individual retirement account) as I have more control and say into how my money is invested.

What’s the Maximum 401(k) Contribution for 2020?

The IRS has set the 401(k) limits for 2020 and allows different amounts depending on your age. 

If you’re under 50, you can contribute up to $19,500 a year to your 401(k). Thanks to the IRS’s catch-up rules, you can invest a total of $26,000 if you still work and are at least 50 years old. 

Keep in mind that these just refer to the amount you put in the account. Your employer can match your contributions beyond this (I realized this great fact this past year). For 2020, the limit for all contributions combined is either the full amount of your salary or $57,000, whichever is less.

How Much Should You Contribute?

If you can afford it, putting the max amount of money into your 401(k) can be a smart idea. Otherwise, try to at least put up to the max amount your employer will match for you (don’t lose free money). Alternatively, You could use 10 to 20 percent of your gross income as a guideline. I’ve always done 15%.

Ultimately, consider your financial situation. Before maximizing 401K(k) contributions, it helps to have an emergency fund and work on paying high-interest debt like credit cards. So, simply invest the most you can comfortably contribute.

Invest in Your Retirement Today

Besides making the maximum 401(k) contribution, know that you can put additional money into other accounts like an IRA or even a custom portfolio.

The IRS has its own contribution limits for different types of retirement plans. Each type can also differ in how taxes are treated and how withdrawals are handled. So, consider comparing retirement plan options or working with a financial advisor to find which will best meet your financial goals. 

Now that you’ve learned about 401(k) plans, check out our other posts about investment and retirement planning.

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