Wednesday, September 20, 2023
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What Is a 401(k) Plan?

After recognizing the importance of a 401(k) plan, your next question may be, “How much should I contribute year after year?” An equally important question is, “How much can I contribute?” A 401(k) has a contribution limit set by the Internal Revenue Service (IRS), which means you can’t just add as much money as you like.

For the 2023 tax year, the maximum 401(k) contribution limit for anyone under 50 is $22,500.2 If you’re 50 or older, the IRS allows catch-up contributions of $7,500 per year on top of the regular contribution limit.2 This is subject to change in any given year, so research each year’s contribution limits at the beginning of the calendar year to see if there are any changes.

When deciding how much to contribute to a 401(k), consider when you want to retire and how much you’ll need to live on each year.

To save 10 times your income by age 67, you’ll need to save around 15% each year starting in your mid-20s.1 This 15% savings rate may sound high, but it includes 401(k) contributions, an employer match, cash savings, and debt repayment. Remember: You can adjust your 401(k) contributions depending on your age and current situation.

If you can’t afford to max out your retirement account each year, you can still aim to contribute enough to get your employer match if it’s offered. This is (practically) free money that you don’t want to leave on the table. Assess your situation every six to 12 months to see if you can increase your contributions over time.

What does it mean to be vested in your 401(k) retirement plan?

The term “vesting” means ownership. It refers to the amount of money in your 401(k) that is yours to keep, whether you stay with your employer or move to another job.

The IRS explains that being 100% vested means you own your entire 401(k) balance, and it can’t be forfeited or taken back by your employer for any reason.3

Some employers don’t immediately give you complete ownership of your 401(k) match dollars. For example, your employer may require you to be on the job for several years before you can be 100% vested in your 401(k) balance.

If you leave your employer before that mark, you could lose some or all employer contributions. However, any contributions made by you, the employee, are yours to keep and cannot be taken away from you.



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