While at lunch with coworkers, we were discussing how much should you contribute to a 401k plan? The answer is to contribute at least whatever amount the company will match. So if your company will match up to 4% of your annual salary that you put into your 401k, then you are throwing away money by not putting at least 4% into your 401k plan.

Everyone’s answers will be different as far as how much more to contribute. If you have a lot of disposable income and are in the higher tax bracket, sometimes putting the IRS max contribution will help save you on taxes. Even if you aren’t in the higher tax bracket, putting money into the 401k will reduce your taxable income. However, I don’t recommend people who live close to paycheck to paycheck or don’t have at least 6 month’s worth of living expenses, which includes mortgage payments in their bank account, to contribute anymore than what the company will match.

Any money that you put into the 401k is tax deferred, meaning you pay taxes when you withdrawl. Some people believe taxes will be higher than they are now in the future and choose to just the tax now or put the money into their roth 401k account which is not tax deferred. If you think your tax bracket will be lower when you retire/withdrawl, then put as much as you can into your 401k account.

401k 2007 Contribution Limits

  • $15500 for those under 50 years of age
  • $15500 plus $5000 additional catch up contribution for those over 50 years of age
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