How much can I contribute to my 401K?

The IRS has instituted yearly limits as to how much salary an employee can contribute to a 401k plan.

For 2021, you can contribute up to $19,500. If you are 50 or older in 2021, you can contribute $26,000.

 

For 2022, you can contribute $20,500. If you are 50 or older in 2022, you can contribute $27,000

What really is a 401K Plan?

A 401k plan is a qualified salary deferral retirement plan under IRS Code Section 401(k). The 401k plan is becoming the dominant retirement plan for the typical large U.S. business. You should also know that you can have a 401K Plan for your Small Business --- which can give you substantial income tax benefits.

The employee can elect to defer (not receive) a portion of their salary. This deferred salary is then deposited into the employer's 401k plan. The employer can elect to match the employee's contribution or a portion thereof. The employer's matching contribution​ becomes an income tax deduction for the employer.

The 401k salary deferral by the employee is not subject to income tax in the year of deferral. This is known as a pre-tax retirement deduction. The employee on his Federal income tax return will only report as wages the lesser amount after the salary deferral.  The salary deferral though is subject to social security and medicare taxes.

How much should I contribute to my 401k?

You should try to contribute as much as possible every year to your 401k plan. You will be decreasing your current year income taxes and forcing yourself to save for your retirement.

It is especially important when your employer has a 401k matching plan --- that's free money to you, don't turn it down.

Investments for your 401k

Your 401k plan documents will specify your rights as to how your contributions may be invested. All 401k plans are different as to these options.

If you don't know anything about investing, you should seek some competent advice. When investing 401k assets or any retirement money, it is always best to be cautious and not to be overly aggressive

Your investment options will probably include money market funds, stock funds, mutual funds and capital stock of your employer. Generally, investing too much into the capital stock of your employer is not a good idea.