A guide to 401(k) plans

If your employer offers a 401(k) plan, it’s your primary ticket to a comfortable, secure retirement.

There are limits on how much you can contribute, but they’re generous. In

2022, you can save up to $20,500 in your

401(k) plan — up from $19,500 in 2021. (Workers age 50 or older can put in an additional $6,500.) And contributions are deducted from taxable income, so you get even more bang from your bucks.

When you’re just starting out, maxing out your contribution can be a challenge. The general rule of thumb when it comes to saving in your 401(k) is to try to contribute 12% to 15% of your gross income. If that’s too much, resolve to put in at least enough to qualify for your company’s matching contributions.

Most large companies offer a match — typically, an employer will contribute from 50 cents to $1 for every $1 the employee puts in, up to the first 6% of pay. If you’re unsure how much you need to contribute to get the match, ask your human resources department or the plan provider.

If your company doesn’t offer a match, or if the company contribution isn’t dependent on your contribution, saving

3% of your pay is usually a good place to start, says Samantha Gorelick, a certified financial planner based in New York City. Once you’ve created an emergency fund and paid down high-interest debt, you can focus on increasing the amount of your 401(k) contributions.

Some companies have auto-escalation clauses in their 401(k) plans, which means they’ll automatically increase your contribution over time. You can usually opt out of auto-escalation, but increasing your contributions will go a long way toward helping you reach your retirement goals. “We recommend potentially increasing the contribution by 1% every six to 12 months,” Gorelick said. Consider increasing your contribution rate every time you receive a raise or bonus.

There are two kinds of 401(k) plans: the traditional 401(k) and the Roth 401(k). As mentioned above, contributions to a traditional 401(k) are made with pretax dollars. That means you’ll avoid taxes now and instead pay taxes on the money when you take it out.

With a Roth 401(k), contributions are made with after-tax money, but withdrawals are tax- and penalty-free, as long as you’ve had the account for five years and are at least 59 when you take out the money. If you receive matching contributions from your employer, they’ll go into a traditional 401(k) account.

There are a number of reasons to opt for a Roth 401(k), or to have a combination of both types of plans. Investing in a Roth 401(k) while you’re young will provide more time for your investments to grow tax-free rather than just tax-deferred. And unlike Roth IRAs, Roth 401(k) plans aren’t subject to income limits, making them a good option for high earners who are ineligible to contribute to a Roth IRA.

DREAMSTIME