How to Add Money to a 401k

by Contributor ; Updated July 27, 2017
Add Money to a 401k

Items you will need

  • Bank account information
  • Payroll deduction form

How to Add Money to a 401k. Employees consider their 401k accounts to be an integral part of their compensation package. The premise behind the 401k is that money deferred from your annual income is invested in publicly traded funds for disbursement upon retirement. You need to add the right amount of money to a 401k in order to take advantage of its benefits.

Store Your Income in a 401k Plan

Step 1

Set up an automatic payroll deduction to your 401k to add funds during each pay period. Employer-sponsored 401k plans do not allow employees to add money to these retirement accounts by check, credit card or funds transfers.

Step 2

Calculate a deferral amount from each paycheck that won't create hardship for you in the near future. You need to create a monthly budget that accounts for 401k, savings and other financial tools. Your 401k should form a majority of your retirement investments in any given month.

Step 3

Review every investment plan your employer sponsors for their 401k plan. Most employees select a conservative money market account that is low risk but provides a steady return over the long term. You should look closely at riskier derivative or index-based plans. Although they offer the opportunity for higher returns, there is also the chance of losing your investment.

Step 4

Cut your annual 401k deferrals from your yearly income if you utilize pre-tax contributions. If you submit $2,000 to your 401k plan and you make $32,000, your tax burden for that fiscal year is calculated on an income of $30,000.

Step 5

Save your family from higher taxes in the future by investing in after-tax Roth IRA accounts. These accounts require taxation on all deferred income but provide tax-free withdrawals from the principal money upon retirement.

Step 6

Ask your employer's benefits manager about matching funds for your 401k account. Employers offer contributions to employee retirement accounts as an incentive for investing in the future. If given the choice, you should choose a proportional contribution level where you supply funds at a certain percentage of your investment.

Tips

  • Distribute your retirement savings into accounts outside of 401k to build an effective nest egg. You should place money made from a second job, bonuses and stock options in a savings account or another retirement plan to maintain a diversified savings plan.

Warnings

  • Avoid withdrawing money from your 401k before the account matures. Federal law applies regular income taxes to your 401k earnings and applies a penalty of up to 10 percent to the amount you are withdrawing. This law applies for all 401k users until they are 59 years and 6 months old.