Is There a Minimum I Have to Contribute to My 401(k) Plan?

No, there is no minimum you have to contribute to your traditional 401(k) plan. To maximize your retirement account potential, on the other hand, there are suggested amounts that should be contributed. There is also a maximum that you are allowed to contribute to your account. That maximum is based on certain criteria.

Key Takeaways

  • For non-automatic plans, there is no minimum amount that you must contribute to a 401(k) plan.
  • There are maximum yearly amounts mandated by law, with the 2023 contribution limit being $22,500.
  • There are also catch-up contributions for those 50 years or older, but these contributions are entirely optional.
  • Automatic enrollment 401(k) plans have a minimum contribution of 3%.
  • Contributions to a traditional 401(k) plan are pre-tax, which reduces your taxes for the year in which they are made.

Suggested 401(k) Contributions

Let’s focus on the suggested amounts first. Some experts state you should have a sum equal to the amount of your yearly income socked away in a 401(k) by the time you are 35. Ten years later, when you turn 45, you should have three times your annual income saved. For example, if your annual salary at age 35 is $50,000, your target retirement savings at age 35 should be $50,000 and your target retirement savings at age 45 should be $150,000.

Other personal financial advisors that workers should invest between 6% and 10% of their monthly income. If you make $2,000 a month, this target sets the goal of between $120 and $200 monthly. As a general rule, saving a little is better than saving nothing at all, but you should strive to save as much as you can while still meeting your daily financial obligations.

Last, one of the golden rules of saving for retirement is ensuring you maximize your employer's match. Employers may offer dollar-for-dollar matching up to a certain percentage of contribution; otherwise, employers may offer partial matching up to a specific limit. For example, a company may offer dollar-for-dollar matching on your first 4% of 401(k) contributions. In this situation, contributions are not required, but many advisors will strongly recommend contributing at least 4% to get the full match.

Maximum Contributions Allowed

If you have higher income that allows you to put aside more money, there are maximum contributions you will need to consider. Workers under the age of 50 can save up to $20,500 in 2022 and $22,500 in 2023. If you are age 50 or over, you can invest an additional $6,500 in catch-up payments for a total of $27,000 in 2022. In 2023, the catch-up amount is $7,500 (for a potential total contribution limit for those 50 and older of $30,000).

If your employer offers pre- and post-tax options, there can be two choices for saving in a 401(k), with implications for your taxes now and for what you'll owe after you retire when you start taking money out of your 401(k).

Option 1: Saving With Pre-Tax Dollars

There are definite advantages to saving as much as possible in a traditional 401(k). One is that by investing the funds, you will have a lower tax burden at the end of the year, as 401(k) contributions are made with pre-tax dollars. This means the amount you invest in the plan effectively reduces your gross income. Less income to be taxed decreases the amount of taxes you owe.

However, it is important to remember that your 401(k) funds will be taxed when you withdraw them, so you might want to keep that in mind when determining how much you want to invest. If you expect to be in a lower tax bracket after retirement than you were before, a traditional 401(k) is likely the way to go.

Contributions to a Roth 401(k) are taxed at the time they are made, which means that subsequent earnings and withdrawals will not be taxed.

Option 2: Saving With Post-Tax Dollars

A Roth 401(k) operates a bit differently than a traditional 401(k) fund, and not all employers offer it, though if they do, they must also offer a traditional 401(k) plan. Instead of your investment dollars going into the fund before taxation, they are invested after being taxed, which means no reduction of your gross income when you contribute. This might mean you have less money you can afford to invest.

The good news is that when it’s time to start withdrawing and living off of the funds, all the money in the account is yours—no tax is due on it as you already paid it when you invested. That applies to any earnings amassed by the account as well (assuming you’re retired and above a certain age). So if you expect to be in a higher tax bracket after retirement than you were before, a Roth 401(k) is probably a good idea.

Once you turn 72, you must start taking the required minimum distributions. There are some strategies and exceptions to these rules, but in most cases, you will have to follow them.

Automatic Enrollment 401(k) Plans

Many companies offer optional 401(k) plans. These plans leave it up to the employee whether or not to participate in the plan and make retirement contributions. Other 401(k) plans may have automatic enrollment. Companies that participate in automatic enrollment 401(k) plans require all employees to sign up for a 401(k) plan.

In addition to requiring enrolling, these types of 401(k) plans require an initial minimum contribution amount. In 2022 and 2023, the initial automatic employee contribution must be at least 3% of the employee's contribution. These automatic contributions may also require escalating contribution rates that may necessitate a savings rate of at least 6% by the fifth year of employment. Employees must make an affirmative election to opt-out of the contribution should they choose.

What Is a 401(k) Minimum Distribution?

A 401(k) minimum distribution is a required amount you need to take out of your 401(k) when you reach the age of 72. This minimum amount does not impact the amount of contributions you put into your 401(k).

What Is the Minimum Amount I Should Contribute To My 401(k)?

Every investor's situation is different, and there is no singular, universal amount every saver should put aside for retirement. The most broad and heavily recommended piece of advice is to contribute enough to at least maximize your employer's match. If your employer offers dollar-for-dollar matching up to 3%, you should try to contribute at least 3% of your pay to your 401(k).

Is a 401(k) Worth It?

A 401(k) has several benefits for investors. First, contributions to the account have tax benefits. Traditional 401(k) contributions are immediately tax deductible for most taxpayers, meaning your current tax liability will be lower. Roth 401(k) contributions are taxed today, but you can take out your retirement savings tax-free in the future.

In addition, employers often match 401(k) contributions up to a certain amount. This is "free money" in the sense that by making a contribution, your account will automatically increase based on the employer's portion. Be mindful that you may be subject to a vesting schedule in which the employer's portion is released based on your tenure with the company.

The Bottom Line

While there is no minimum amount you must invest in a 401(k), there are maximum amounts above which you cannot go. Because 401(k) contributions are made with pre-tax dollars, the amounts you contribute will reduce your gross income, which in turn will reduce your taxes.

You may also have the option to set up a Roth 401(k), whose contributions are taxed at the time they are made. The benefit of that is that your subsequent withdrawals during retirement will not be taxed, and neither will the earnings made by those funds while in the Roth 401(k). Remember, whichever approach you choose, pre-tax or post-tax, investing in your retirement is always a good thing.

Article Sources
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  1. Internal Revenue Service. "Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits."

  2. Internal Revenue Service. "Operating a 401(k) Plan."

  3. Internal Revenue Service. "401(k) Plan Overview."

  4. Merrill Edge. "What Percentage of My Salary Should I Put into My 401(k)?"

  5. Internal Revenue Service. "401(k) Resource Guide - Plan Participants - General Distribution Rules."

  6. Internal Revenue Service. "Retirement Topics - Designated Roth Account."

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