401K plans and their cousins, 403B plans (as well as 457 plans and Federal Thrift Savings Plans – these types of plans are collectively known as “qualified” plans) provide a great way to save for retirement. Employee contributions are tax deductible, and the earnings are tax deferred until their withdrawal. There are no earnings restrictions as there are with IRA accounts, and this applies to traditional 401K as well as ROTH 401K contributions. Making contributions to a 401K or 403B plan is convenient as it is typically withheld from the employee’s paycheck. Oftentimes, employers will match employee contributions, and sometimes they will make additional profit sharing contributions as well.
The maximum which an individual may contribute to a 401K or 403B plan is $18,000 for the 2017 tax year. Persons 50 or older may contribute an additional $6,000 per year. These employee contributions are deferred from the salary of the plan participant, and are not included in the participant’s adjusted gross income. Employer matching contributions are determined by the employer’s policy and are usually specified in the plan documents and summary plan description.
How much you should contribute to your 401K plan will depend upon your age, income, tax bracket, and investment objectives and retirement goals. It is recommended, however, that you “max out” the employer match if there is one. Not doing so will leave money on the table which would have been easy to obtain.