How Much You Should Contribute In Your 401k Plan?

Written by PaayiAdmin |01-Aug-2020 | 0 Comments | 378 Views

It is always appreciable if you contribute some amount to your 401(k) plan, but it may happen that in some of the time it is not so good. But usually, it is good to contribute more or less to your 401(k) account.

You should consider contributing to your 401(k) account when you are already having saving account for emergency financial need, and also if you are having required insurances like health insurance, property/casualty, and life insurance.

The main aim of the 401(k) account is to provide you income in your retirement, and it is designed in a way that it becomes difficult when you need money before retirement. 

In any financial emergency, or medical need or if you lose your job you won't be able to access your 401(k) account and if you do such additional taxes and higher penalties will be incurred upon you.

You should understand the 401(k) plan is to use in your retirement years not to pay off debts, or for your expenses. If you have enough saving account then you can contribute to your 401(k) plan, below you can see the criteria for this.


Get All Your Company Match Account

You should find in your company if they are providing you with any matching contributions to your 401(k) plan. If you contribute some percentages of your income in your 401(k) plan, they may get matched up from dollar to dollar and this way you can have 100% return on any contribution which you are making in your 401(k) account.

Most of the companies will match up your contributions up to specific percentages of your income, and some companies will contribute in your 401(k) plan by way of profit sharing it does not matter whether you are contributing or not.

Companies which are matching contributions to your 401(k) plan are usually under 'vesting schedule' this schedule defines how much money companies should contribute to your account if you are not working with them. Usually, you will get the whole amount of your 401(k) plan contributed by you.

Some contributions like 'safe harbor match' are always 100% vested, it means the amount will be your even you leave the job after the money gets deposited by them. 

Other contribution like 'profit sharing contribution' has got more restrictions in their vesting schedule as you have to remain employed for at least five years or more to get the 100% money in your 401(k) account contributed by them.

If your plans are not to work with the company for longer duration and contributions made by the companies are subjected to a lengthy vesting schedule, in that case, the matching contribution doesn't have much effect to determine how much you should contribute to your 401(k) account.   

If the companies vesting schedule is for short duration and also matching up the contributions and you have the plan to work with them for a while, then you should contribute enough to match the company contribution every year.


While Making The Contributions Consider The Taxes Incurred

The 401(k) plan allows to have pre-tax contributions, but some plans also allow you to have an after-tax contribution and many plans are now a day's also allowing you to make Roth Contributions. Each type of contribution has their taxation methods.


Pre-Tax Contributions:

These are the contribution made by you in your 401(k)  which are not included in your taxable income of the year. If you need to withdraw money from your 401(k) plan, then you have to pay the taxes on the amount withdrawn.

For the people who come under high tax bracket, these type of 401(k) contribution is best suited to them, as for the coming years you will remain in the same or lower tax bracket for the contributions which you are making.

If you already have much money in your tax-deferred accounts, then you would like to do the long-term planning before deciding whether you should continue contributing more in your pre-tax money to the plan. Just when you retire and having too much money in your tax-deferred account can be problematic for you.


After-Tax Contributions in 401(k):

These are almost similar to non-deductible IRA contributions, the time when you withdraw any amount you will be taxed only if there is any gain, as you have already done with your taxes on the amount of the contributions so no need to pay the incomes taxes on the amount when you withdraw it.

There is only few 401(k) plan which allows you to have after-tax contributions, and in case you retire, you can roll your after-tax contributions to Roth IRA.


Roth Contributions in 401(k):  

In this type of contribution, the money goes into your account as after-tax and then will grow tax-free. It is an advantage to have money in your Roth account after your retirement, as you don't have to pay taxes on the money withdrawn and it is out of your social security formula as well.

It is most suitable for the people who are in the low tax bracket, and while making contributions for next ten years, you expect to be in higher tax bracket when you start withdrawals. 

Roth 401(k)  contribution is also best in the case when you have a long duration to let the money grow that too without any taxes.

Once you have made up your mind to contribute to your 401(k) plan, you should revisit the amount you are providing to your plan time to time, depending as per the changes in your income and the plan limits.


401(k) Contributions For The Self Employed    

If you are self-employed or have a small business, in that case, you can opt for the simple 401(k) plan which would be easy to manage and handle. You can choose from various retirement plans, especially for the small businesses.

It is always said that the money saved is the money earned, and if you have enough savings it will help you out in many ways in the future.

So, just start saving and also evaluate how much you can contribute to your 401(k) plan as per your specific situation and need.


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