It’s Never Too Late to Contribute to Your 401(k)

October 21, 2015 — 8:15 AM EDT

It is best to begin saving for retirement as early as possible, and there are numerous products available to help you ensure your future is financially stable. Contributing to employer-sponsored retirement plans, such as 401(k) plans, is one of the most popular ways to boost retirement savings. If you never had the opportunity or foresight to set aside money during your early working years, however, it may seem like it is too late to start contributing to your retirement plan. While it may be preferable to start saving for retirement as soon as you enter the workforce, rest assured that though you may be in your late 30s, 40s or even 50s, it is always the right time to start contributing to your 401(k).

What Is a 401(k)?

A 401(k) is a qualified retirement savings plan offered by your employer. Contributions are made through salary deferrals, on a pre- or post-tax basis, depending on the type of 401(k) account you have. Once funds are contributed to a 401(k), the plan administrator invests the pool of all employee contributions into various securities, mutual funds and bonds to generate interest income. When you retire, your 401(k) is worth more than the combined total of your contributions because of the power of compound interest earned over time. Some plans offer the option for you to self-manage your account and hand-pick which securities your contributions are invested in, but this option is best suited for those who are experienced investors.

While the IRS provides certain guidelines to which all 401(k) plans must adhere, the specific terms of each plan are dictated by your employer. However, no matter what plan your employer offers or how old you are when you start contributing, there are three key ways you can make the most of your 401(k) savings.

Maximize Your Contributions

In 2015, the contribution limit for 401(k) retirement plans is $18,000 annually. However, this limit is typically raised every few years to compensate for cost-of-living adjustments. In addition, plan participants over the age of 50 are eligible to make additional catch-up contributions of $6,000, for a total of $24,000 each year. This increased contribution limit is designed specifically to encourage older plan participants to bulk up their savings in the years leading up to retirement.

It is important to note that 401(k) plans may accept contributions from both you and your employer. Often, any contribution made by your employer is dependent upon your own contribution. However, some employers elect to sponsor plans that require they contribute a certain percentage of employee compensation regardless of employee contributions. This means even if you do not make any contributions in a given year, your employer may be required to contribute anyway. This is just one reason it may behoove you to start a 401(k) even if you are not ready to contribute on your own. While this scenario is not common, it is not unheard of; more commonly, employers match your contributions, up to a certain percentage of your annual compensation, rewarding employees who save for retirement by effectively doubling some or all of their contributions. In other cases, employees are not required to make any contributions, so it is important to review the terms of your employer's plan. The maximum total 401(k) contribution in 2015, including employer and employee funds, is the lesser of 100% of employee compensation or $53,000.

Sidestep the Vesting Schedule Money Pit

One of the most aggravating things about contributing to employer-sponsored retirement plans early in life is you may end up forfeiting a sizable portion of your savings due to your plan's vesting schedule if you decide to change jobs.

A vesting schedule is simply a time line that dictates the degree to which plan participants are entitled to their account balances based on the number of years they have been employed. While your own contributions are always 100% vested, employer contributions to your plan may be completely or partially forfeited if you have not worked for your employer for a minimum number of years. If you do not begin contributing to your employer-sponsored 401(k) until later in life, you may not have to deal with this inconvenience because you likely already met the tenure requirements.

However, if you are considering changing jobs, make sure to review your plan's vesting schedule and consider the potential impact on your retirement savings. If there is a little wiggle room in your future employment plans, you may decide to delay a change until you are fully vested.

Choose the Right Account for You

When you begin contributing to a 401(k), no matter what your age, it pays to know what type of account your employer offers. In general, 401(k) plans are traditional, but you may also be offered the opportunity to contribute to a Roth account. The only difference between a traditional and Roth account is the source of the contributions. Any contributions you make to a traditional account are made on a pretax basis. This means a portion of your monthly compensation pay is deducted from your paycheck, according to your specified deferral amount, before any income taxes are deducted. This type of contribution effectively reduces your annual taxable income. Instead of paying income taxes on those funds in the year they are earned, you pay tax in the year they are withdrawn. This type of account is especially popular among those who believe they will be in a lower tax bracket after retirement.

Conversely, Roth accounts are suitable for those who think they will be in a higher bracket later in life because contributions to Roth accounts are made with after-tax dollars. You pay income tax on your full compensation each year, but qualified withdrawals from your Roth 401(k) are tax-free.


Depending on your annual compensation, you may be able to store up quite a healthy nest egg even if you do not begin contributing to a 401(k) until later in life. Assume, at age 50, you plan to retire at the official full retirement age of 67. If you make the maximum contribution of $24,000 each year, you will have invested $408,000, even without taking into account increasing contribution limits, employer contributions or interest earnings.

If your employer matches your contributions up to $15,000 each year and your plan earns a consistent 6% rate of interest, your account will grow to $1,100,302 by the time you retire in 17 years. Even if you make a maximum contribution of $24,000 and your employer pays in $15,000 in the first year and you never make another contribution, your account will still grow to $105,018.

Admittedly, $24,000 is a lot to defer unless you earn a substantial salary, and hopefully you are able to begin contributing before 50. Using the same projected retirement age, assume you begin contributing $7,000 per year at age 40. Your employer matches your contribution up to $15,000, so your actual annual contributions are matched at 100% for a total contribution of $14,000 each year. At an annual interest rate of 6%, your account would grow to $891,880 by the time you retire in 27 years.

Of course, the earlier your begin contributing, the more you can take advantage of the benefits of compound interest. However, even if you do not start saving for retirement until later in life, you can save a substantial amount if you make the most of contributions limits. If you have any experience investing, you may also be able to generate higher returns by self-managing your 401(k).