While your goal should ideally be to save 10 to 15 percent of your income for retirement, don’t be discouraged if you can’t contribute that amount yet, said Kyle McBrien, a certified financial planner at Betterment, a financial services company. “It’s OK to start small,” he said. Try to gradually increase your contribution each year.
Even if you can donate the maximum amount, that doesn’t necessarily mean you should, Mr. McBrien said. For example, if you have not built up a sufficient fund for unexpected expenses or job loss, this should take priority over making a contribution to your 401(k) in excess of your employer’s contribution.
“Fill your emergency fund first,” he said.
You may have other goals besides retirement that you want to save for, said Craig Copeland, director of wealth benefit research at the Employee Benefit Research Institute. Maybe you have children and want to save for their education in a 529 college fund or in a health savings account – a special account that can cover short-term medical needs or invest for retirement.
“If you want to save money,” he said, “think about where it’s going to go.”
Here are some questions and answers about saving in a 401(k):
Do additional 401(k) contributions have to be treated as Roth contributions if I am a high earner?
Not yet. Under the Secure 2.0 Act, a law passed late last year, savers with incomes of $145,000 or more who make catch-up 401(k) contributions would have had to make them as after-tax Roth contributions starting in 2024. But this summer, the IRS delayed that provision for two years after employers and plan administrators said they needed more time to prepare. (Not every 401(k) plan offers a Roth option.) Therefore, for next year and at least for 2025, additional pre-tax contributions may be made to a traditional 401(k) plan for those age 50 and older, even for high earners .
Can I change the amount of my 401(k) contributions after open enrollment?
The annual open enrollment period is underway in many workplaces, where employees select their benefits for the new year. While health insurance options are typically fixed year-round unless you have a big change coming up in your life, many employers allow you to adjust your retirement contributions at any time. (Check with your employer to be sure.) Note that it may take one or two payroll cycles for the change to take effect, Betterment’s Mr. McBrien said.