Your 401(k) Contribution Amount
Before deciding how much to contribute to your 401(k) plan, find out three key figures:
What is the maximum percentage of your pay that can be contributed? The maximum legal limit that can be contributed in 2012 is $17,000 plus an additional $5,500 catch-up contribution for participants age 50 and over, if permitted by the plan. However, most employers set limits in terms of a percentage of your pay to comply with government regulations. This limit ensures that plan does not discriminate in favor of highly compensated employees.
How much of your contribution is matched by your employer? Employers are not required to provide matching contributions, but many do. A common match is 50 cents for every dollar contributed, but many other variations also exist.
Up to what percentage of your pay does your employer match? Most plans only match contributions up to a certain percentage of your pay. For instance, the plan may only match contributions up to a maximum of 6% of your pay. Assume you 401(k) plan allows contributions up to 10% of your pay annually, with a 50-cent match on every dollar contributed, up to a maximum of 6% of your pay. With a $100,000 salary, you can contribute up to $10,000 to the plan. Your employer will match up to the first $6,000 of contributions ($100,000 times 6%), contributing a maximum $3,000 (50 cents for every one dollar).
How much should you contribute to your 401(k) plan? If at all possible, contribute the maximum allowed. In the above example, that would be 10% of your pay. At a minimum, contribute enough to receive the maximum matching contribution. That would be 6% of your pay in the above example. Please call if you’d like help deciding how much you should contribute to your 401(k) plan.
