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What Should Be Your Maximum 401K Contribution?

By Edited Nov 13, 2013 0 0
401K vs RothIRA

What is the maximum 401K contribution we should make to feel comfortable that we're saving enough of our money for retirement, and at the same time, making the best use of our money?  This question might be a tad on the broad side - therefore I will try to answer it from the employee perspective....since most people in our country are generally hard-working employees.  

Usually a company offers a 401K matching program to its employees as one of the many benefits they provide...they match anywhere between 3% - 5% of an employees monthly contribution.  It is wise for employees to take advantage of this matching because if not - then they're leaving money on the table.  But the maximum 401k contribution should be only what the company matches.  Likewise, an employee should only contribute up to the maximum amount that an employer matches.  

Therefore, if a company matches 4% of an employee's contribution, then the employee should contribute a full 4%.  If the employee can afford to contribute more than 4%, it may be more beneficial to invest in another vehicle, such as a Roth IRA, for the additional income he/she is looking to set aside for the future.

The reason why is because with a Roth IRA, all contributions are made with after-tax income.  And the contributions an employee deposits within a Roth IRA account will grow tax free!  So, for instance, if you're able to set aside 6% of your monthly income - but your company only matches 4% , then put in 4% with your company's 401K plan and invest the other 2% into a Roth IRA.  This way you're able to diversify your retirement between a tax-deferred plan and a tax free plan.  

Just think - your 401K forces you to take a RMD (required minimum distribution) at the age of 70 1/2.  Your Roth IRA doesn't have this requirement!  It's good to have options my friends.




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