Contributions to your 401(k) account are automatically deducted from your pre-tax pay, causing many people to wonder how much of an impact saving will have on their take-home pay. Putting money aside for retirement as soon as possible after starting your career is essential, but your contribution level shouldn't impact your paycheck more than your budget can handle.
Your 401(k) deductions are made on a pre-tax basis, so your take-home pay won't be decreased by the same amount as your contribution. When you contribute to your 401(k), your total amount of taxable income is lowered, so you pay fewer taxes than you would if you didn’t participate. You’ll be taxed on your withdrawals when you hit retirement age or if endure financial hardship and need to take money out earlier.
Most experts recommend putting at least 15 percent of your pre-tax income into your 401(k) for retirement. However, this can be difficult when you’re just starting out in your career and not making much money. Gradually increasing your contribution level is a good way to get to the savings level where you need to be without really noticing the deduction from your paycheck. As your salary increases, raise your 401(k) contribution by a percentage or two to create less of an impact on your finances. Starting your 401(k) savings early, while you’re still in your twenties gives you an advantage over those who wait to begin contributing until their thirties. You may be able to save less money each month and realize the same returns, or even greater, thanks to compound interest on your funds.
Employer Match Program
If your company offers a 401(k) match program, contribute the maximum amount optimizes your benefits. For example, if your company matches 100 percent of your contribution up to 4 percent, don’t pass up this opportunity to boost your savings levels. This is essentially free money added into your retirement account.
Changing Contribution Levels
Contributions to your 401(k) are voluntarily and completely at your own discretion. Most plans allow you to adjust your contribution levels at any time, so if you feel like you’re saving more than you can afford or not enough, you can always log in to your account and update your percentages.
Laura Woods is a Los Angeles-based writer with more than six years of marketing experience. She has a Bachelor of Arts in communications from the University of Pittsburgh and an MBA from Robert Morris University.