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It can take some trial and error to find the right 401(k) formula.

If you want to contribute to a salary reduction plan, but you’re feeling confused, you’re not alone. Even the parts that are fairly easy to do—including deferring current income into your plan—aren’t always easy to understand. That’s true in part because some fairly complicated federal rules govern these plans. And each employer’s plan is a little different from every other one.


There’s no one answer to the question of how much to contribute to your 401(k) or 403(b) plan. In fact, the answers you get may seem contradictory.

The federal government caps the dollar amount you can contribute in any one year. For 2018, that limit is $18,500 for all plans but SIMPLEs, where the cap is $12,500. All caps may be adjusted upward in the future.

If you decide to contribute, you have to figure out how much you should have taken out of your earnings each pay period. Your employer may require a minimum percentage of your salary if you want to participate, often 1% to 2%. And ideally, you’ll want to be saving 10% to 15% of your earnings if you can, though not necessarily exclusively in your retirement plan. That range gives you lots of flexibility but not necessarily an easy answer.

Remember, though, that the choice you make can always be changed so that you contribute more or less going forward than the rate at which you started. It may take a month or two for your revised percentage to take effect, but there are no other consequences for changing your mind.


If your employer matches part of your retirement savings contribution, that amount doesn’t count toward the government’s dollar limit. Nor does it reduce the percentage of earnings you’re allowed to contribute. The only catch is that while you are vested immediately in your contribution, you probably will have to stay on the job a number of years to be fully vested in your employer’s contribution. When vested and change employers, you can take the plan assets with you.


Employers who elect to match some or all of their employees’ contributions can set their own rules for how this program operates. One typical approach is for the employer to match 401(k) Mix and Match It can take some trial and error to find the right 401(k) formula. 50% of what an employee contributes, up to a maximum of 6% of earnings. Using that example, if you earned $40,000 and contributed 6% of your salary, or $2,400 to a 401(k), your employer would add $1,200. That’s 50% of 6%. Even if you contributed 10% of your salary, the same employer would still contribute $1,200, or 50% of 6%. But if you contributed only 4% of your salary, or $1,600, your employer would add $800, or 50% of your contribution.


Even if you’ve mastered the rules on contribution limits and the various ways matching contributions are handled, it’s still easy to get confused about how much you should put away. While there’s no one answer for everyone, many experts say that you should max out, contributing up to the government’s cap.

If that’s a higher amount than you can afford, you should contribute as much as you feel you can. And if your employer matches a percentage of what you contribute, you should put in at least enough to qualify for the maximum match. Since the matching contribution is essentially free money, you don’t want to miss out on it.

On the other hand, if your employer doesn’t match your contribution or the investment choices that your plan offers are limited, you might decide to contribute the maximum to an individual retirement account (IRA), perhaps a tax-free Roth IRA. You can invest as you choose, and you may be able to move your IRA savings into another employer’s plan in the future.