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When it comes to personal finance, one question that often pops ups is “how much should I contribute to my 401(k)?” While there is no one-size-fits-all plan for saving for retirement, there are a few steps you can take to help make sure you’re making smart saving decisions.
Although this is by no means financial or investment advice, the ideas given in this article may help get you thinking.
A 401(k) is a retirement savings account that many employers offer their staff. With 401(k) plans, your employer typically provides a list of investments (usually mutual funds) you can choose to invest in.
It’s worth noting that 403(b), 457(b), and SIMPLE IRA plans are similar options also offered through employers. One significant benefit of an employer-sponsored 401(k) and similar plans is that your employer may provide partial or full contribution matching.
If your employer offers a match, it means they will match all or part of your contributions. However, those employer contributions may be subject to vesting requirements, which are sometimes based on how long you’ve been with the company. Further, 401(k) plans can also carry tax benefits that may also help you build your retirement fund.
The maximum amount you can contribute increased to $19,000 in 2019.
Employee contributions to 401(k) accounts increased to $19,000 in 2019 . This means that you can contribute $1,583.33 a month if you want to max out your 401(k) retirement savings this year.
For a lot of folks, however, putting more than $1,500 a month toward retirement isn’t possible. (So, don’t worry if the idea of saving that much is making your eye twitch.)
Saving for retirement is a long-term goal, and starting small is much better than not starting at all, even if you’re only contributing the equivalent of a daily latte.
There is no universal answer to how much you should contribute to your 401(k), and many people find that maxing out their 401(k) with $1,583.33 a month isn’t financially feasible. But there are some smart guidelines you can follow to help make sure that you’re saving responsibly.
If you’re left wondering “what percent I should contribute to my 401(k)?”, the simplest answer is if your employer offers a match, it may be worth contributing enough to take advantage of the match—because that’s essentially free money. And one in five workers who are offered a match don’t take advantage of it.
After you contribute the amount your employer matches, it’s up to your unique financial situation how much additional money you put in your 401(k). For example, if you’re paying down credit card debt, you may not want to contribute additional funds right now. But if you’re living a debt-free life, perhaps you could consider upping your contribution.
What about if you’re trying to pay off debt while also saving for retirement? It’s easy to ignore savings in favor of paying off debt as fast as possible, but it may still be possible to save while paying off debt.
If you’re going to contribute to a 401(k) while paying off any type of debt, then it may be a good idea to at least contribute the amount your employer matches.
Beyond that, it depends what type of debt you’re paying off. If you have high-interest debt, you’ll potentially want to focus your efforts on getting rid of that. However, if you have a relatively low-interest student loan, you may be able to increase your retirement contribution while still making your minimum monthly payments.
One big no-no is missing loan payments in order to save for retirement. With student loans, for example, your first financial obligation is to make at least the minimum payment due. If you stick your money in a retirement account instead of paying your student loans, you could risk default, which could tank your credit score and lead to higher interest rates over time.
But paying off debt and saving at the same time isn’t impossible. If anything, you may at least want to strive to put away enough retirement savings to take advantage of the employer match programs discussed above.
Otherwise, you may be leaving free money on the table. If you still have some spare cash leftover after meeting your other obligations, one potential option is to add that to your 401(k), or an individual retirement account.
Some people may qualify for both an IRA and a 401(k).
No 401(k)? No problem. Not all employers offer 401(k)s, so you may find yourself needing other retirement savings vehicles. One other option may be an IRA.
An IRA (or individual retirement account) is opened and controlled by you, not your employer. You can use IRAs to invest in a variety of things, unlike 401(k)s, which may restrict you to certain portfolios.
Like 401(k)s, IRAs may offer tax-free growth. Some people may qualify for both an IRA and a 401(k). Freelancers and self-employed folks may find that a SEP IRA (Simplified Employee Pension sometimes chosen by freelancers, which often have higher limits for annual contributions than a standard IRA) or Solo 401(k) (a recently established retirement plan that’s only for sole proprietorships) may offer more generous contribution limits for their specific circumstances.
If you are leaving a job with an employer-sponsored retirement plan, you can also roll over your old 401(k) into an IRA with SoFi in order to potentially access more investment options and/or possibly lower your investment fees.
This article originally appeared on SoFi.
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