Determining Your 401(k) Contribution

Sandy Guidicianne, Director, First Republic Private Wealth Management
March 9, 2022

  • Employees can contribute up to $22,500 to their 401(k) in 2023, plus $7,500 for those 50 and older, per the IRS.
  • Experts recommend contributing at least up to your employer match to maximize retirement savings.
  • Even if you can only set aside a small amount, the earlier you start and the more consistently you contribute, the better prepared for retirement you’ll be.

Creating a financial plan early puts you on track to enjoy the happy and comfortable retirement you want. Retirement savings vehicles, such as a 401(k), help you start stowing funds away for the future. The contributions you make to your 401(k) today may have a large impact on what your retirement will look like later.

Understanding the benefits of a 401(k), as well as how much you can contribute to your 401(k) annually, can help you create an informed financial plan for a stress-free retirement. Read on to learn how to determine your 401(k) contribution and how it can affect your taxes.

What is a 401(k) and how does it work?

A 401(k) is an employer-sponsored retirement savings vehicle that allows employees to plan for their retirement. When you contribute to a 401(k) with pre-tax dollars, you agree to deposit a percentage of your income, called an elective-deferral contribution, into an investment account. Your employer may match some or all of your contribution — amounting to extra income — thereby accelerating your retirement savings.

Regular contributions to your 401(k) are a way to accelerate your retirement savings because your investments grow tax-deferred, and you’ll benefit from any matching contributions from your employer. As you decide how much to contribute to your 401(k), consider how much money you will need to live on in retirement. First Republic recommends contributing at least as much as the employer match or maxing out the annual contribution amount, if possible. And remember: traditional 401(k)s feature required minimum distributions (RMDs) beginning at age 72.

A 401(k) also differs from other retirement savings vehicles, such as an individual retirement account (IRA) or Roth IRA, which may be set up independent of your employer.

401(k) tax advantages

When you contribute to a traditional 401(k), you receive the income tax deduction on your contribution now and pay taxes when you withdraw funds in retirement.

With a Roth 401(k) — another employer-sponsored plan — contributions are funded with after-tax dollars, meaning you will have to pay income tax on your contributions now, but when you withdraw funds in retirement they are income tax-free.

Withdrawing funds from your 401(k) early — before age 59 ½ — comes with tax liabilities and penalties. You will be required to pay income tax on the withdrawn funds, as well as a 10% early withdrawal penalty.

Regardless of which type of 401(k) contributions you choose, keeping your money in the account until retirement is the best way to avoid taxes or penalties, even if you switch jobs. In that case, you’ll generally have the option to keep your funds in your old employer’s plan, transfer the money to your new employer’s plan or roll the funds into an IRA.

How much should I have in my 401(k)?

In general, experts recommend that you will need 80% of your pre-retirement income once you retire. However, your needs may differ depending on your financial situation — for example, if you’ll still have a mortgage when you retire. Consider how much you’ll be making in retirement, what your expenses will be and your overall retirement goals to determine what you’ll need.

As you set savings targets, take into account:

  • Your income and basic expenses: This will provide insight into how much money you may have available to save.
  • Your other savings goals: Generally, money placed into a 401(k) can’t be withdrawn until age 59 ½ without incurring a penalty. Ensure you leave room in your budget for easily-accessible savings, such as building an emergency fund, as well as mid-term life goals.
  • Your current age and the age at which you plan to retire: Contributing to your 401(k) early allows you more time to accumulate returns via compounding interest. However, you may opt to start with a smaller goal that feels manageable now, then ramp up your contribution amounts as you get closer to your retirement age.

How much should you have in your 401(k) by age

Although no two individuals are the same, it can be helpful to see the data to gauge the right amount to have in your 401(k). To compare your retirement savings benchmarks against actual data, take a look at Vanguard’s annual How America Saves study for 2022. They aggregated the 2021 average account balances of Vanguard defined contribution plans — an umbrella term that mostly consists of 401(k) plans. Here’s what they found:


Average Account Balance

Median Account Balance

< 25



25 – 34



35 – 44



45 – 54



55 – 64



65 +




What percentage should I contribute to my 401(k) per paycheck?

Contributing to your 401(k) helps put you on track to achieve the retirement you want. However, you'll need to assess your personal circumstances as you decide how much to allocate, especially if you are relatively new to retirement savings.

Maintaining a constant contribution rate of your annual salary allows you to steadily reach your ideal amount as your income grows, so saving for retirement feels manageable. Start with a percentage that feels comfortable, then strive to increase your contribution until you reach the annual limits.

Compounding Interest in Action

Even a small percentage adds up over time. For example, an employee who earns a gross annual income of $80,000 and contributes 5% of that number to their 401(k) will save $4,000 annually. After 35 years, they will have contributed $140,000 to their 401(k) — and assuming a 5% annual rate of return on their investment, they will have accumulated $370,989 in their 401(k), not including the employer match.

This is largely thanks to compound interest, which means the account earns interest not only on the principal balance, but on interest accumulated over time, too.

As a rule of thumb, many savers have found the 50/30/20 approach helpful for their savings plan. This involves committing 50% of one’s net income to needs, 30% to wants and 20% to savings. But ultimately, you need to plan your individual financial situation accordingly. No matter how much you choose to contribute, creating a contribution plan now can help ease your financial stress about the future and build your confidence when thinking about retirement.

401(k) employer match

Many companies offer contribution matching, which means an employer will match a percentage of employee contributions to their 401(k)s. These contributions add to the total value of your 401(k) and will provide even more security in retirement.

Company Matching in Action

If the employee above, for example, has an employer who will match 50% of their 401(k) contributions, up to 6% of their salary, the company will contribute an additional $2,400 to their 401(k) each year.

After 35 years, the company match will have added $105,000 to their 401(k), and the employee will have accumulated $834,734 total — over $278,000 more than if they didn’t have company matching.


Average 401(k) match

According to Vanguard’s 2022 study, the average value of matching employer contributions is 4.4% of pay. However, due to varying company vesting schedules — that is, the time it takes for an employer match to actually belong to the employee — workers may not see their matched funds in their retirement accounts immediately, per federal guidelines.

How much can I contribute to my 401(k)?

While experts generally recommend saving as much for retirement as possible, the Internal Revenue Service (IRS) limits how much you (and your employer) are able to contribute to your 401(k) each year. Understanding these limits can help you set goals accordingly and avoid the penalties and taxes that can come with overcontribution.

401(k) contribution limits

When determining how much to contribute to your 401(k), consider these three annual contribution limits:

  • Salary deferral limit: In 2023, employees can contribute $22,500 to their 401(k)s annually, plus $7,500 for employees 50 and over. This limit doesn’t include contributions from your employer.
  • Annual compensation limit: In 2023, the limit caps at $330,000 when you stop deferring a percentage of your pay.
  • Total contribution limit: For 2023, your total contributions — including employee and employer contributions — must not exceed $66,000 or be greater than your pay, whichever is less.

401(k) catch-up contributions

To help those closer to retirement prepare themselves sufficiently, employees aged 50 and older may make catch-up contributions of an additional $7,500 to their 401(k) plan annually, for a maximum amount of $30,000 during the 2023 tax year.

401(k) contribution FAQ

Check out these frequently asked questions to learn more about 401(k) contributions.

Does employer match count toward 401(k) contribution limit?

No, an employer match doesn’t count toward an employee’s 401(k) contribution limit. An individual’s contribution limit is $22,500 in 2023. However there is a limit to an individual and their employer’s combined contribution limit, which is the lesser of $66,000 or the employee’s salary.

Should I max out my 401(k)?

It depends on your retirement savings plan and individual circumstances; defer to your financial advisor’s investment advice. However, try to take full advantage of an employer match, and beyond that, you may want to consider other investment options.

What should I do when I max out my 401(k)?

You can continue to grow your retirement savings, even after you’ve maxed out your 401(k) contribution. Consider investments in other retirement savings vehicles, such as a traditional IRA or Roth IRA, to maximize retirement savings. A financial advisor can help you understand the investment opportunities available to you, so you can make an informed decision.

Can I max out my 401(k) or IRA?

Yes. Beyond the annual contribution limits for 401(k)s, IRAs also feature an annual contribution limit of $6,500, or $7,500 for those 50 and older. There are certain criteria that make people who have a 401k not eligible for an IRA.

Is it possible to overcontribute to 401(k)?

Yes, and doing so can incur additional taxes.

To prevent this from happening, you should contact your 401(k) provider as soon as possible and report the overcontribution to the IRS before April 15 of the following year, so the money will be returned to you as taxable income.

How to make the most of my 401(k) contributions

When it comes to retirement savings, experts recommend you start saving early. Contributing to your 401(k) early offers tax advantages since your savings can grow tax-deferred for decades. Doing so also allows more time for your savings to accumulate returns, so you have more money available in retirement. Even if you’re starting small with your contributions, they can grow over time. Saving a smaller percentage when you’re young can help you juggle competing financial priorities, such as saving for a home, while also preparing for the future.

As your income grows and your financial situation evolves, you can set more aggressive savings goals for your 401(k). The more you can ramp up your contributions, the better, as the amount you contribute may play a large role in what your life will look like in retirement.

Saving for the future may feel intimidating, and if you’re struggling to create a retirement savings strategy, help with managing your 401(k) retirement plan is available. Consulting a financial advisor can help you assess your personal finances, overcome obstacles and set realistic goals, both for the present and the future.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use.