Is Contributing 50% of My Salary to My 401k a Smart Move?

It’s not a given that you’ll have access to a 401(k) plan through your job. But if your company does offer one of these plans, there can be benefits to signing up.

In this Reddit post, we have someone asking whether they should contribute 50% of their salary to their 401(k), which would have them maxing out by the end of the year. It happens to be that their employer will match 75% of those contributions, so it’s a tempting offer.

The poster says they have a nice amount of near-term savings, so they don’t think it will be a problem to part with half of their salary. But the question remains as to whether it makes sense to put half of their income into a 401(k).

The upside of saving in a 401(k)

There are a number of benefits to saving for retirement in a 401(k) plan. First, if you’re eligible for a generous employer match, you can score free money for your retirement. Secondly, you can enjoy a tax break on the money you put in.

If you save in a traditional 401(k), your contributions go in tax-free, and gains in your account are tax-deferred. If you save in a Roth 401(k), there’s no up-front tax break on contributions, but your gains are yours to enjoy tax-free. Withdrawals are also tax-free in retirement.

Plus, saving in a 401(k) is a good way to stay disciplined. Once you sign up for your 401(k), your contributions will be taken as automatic payroll deductions. This means you won’t be tempted to spend the money elsewhere, since it will come out of your paycheck before it reaches you.

Be careful not to go overboard in a 401(k)

It often makes sense to contribute enough to a 401(k) to claim a workplace match in full. Since the poster here has a very generous match, as well as a few years’ worth of liquid assets to live on, they’re not taking a very big risk putting 50% of their salary into a 401(k). And this way, they can capitalize on their workplace match in full.

However, generally speaking, it may not be a good idea to contribute half of your salary to a 401(k). For one thing, you may end up retiring early and wanting access to your nest egg before age 59 and 1/2. With a 401(k), there’s an early withdrawal penalty to worry about. So you may want to keep a portion of your long-term savings in a taxable brokerage account.

Also, some people feel that their 401(k)s don’t offer as many investment choices as they’d want. If you don’t love the options in your 401(k), you may want to contribute enough to claim your workplace match in full, but then branch out into an IRA.

If you’re considering putting a large amount of money into a 401(k), before you do:

• Review your expenses to make sure you can afford to pay your bills without the money you’re contributing
• Make sure you have a solid emergency fund in case unplanned expenses arise
• Review your plan’s investment choices to make sure they align with your strategy and goals

It’s also a good idea to talk to a qualified financial advisor about where to save for retirement. They can review your company’s 401(k) plan to see if it offers good investments. From there, they can advise you on how much to contribute to a 401(k) versus another savings plan.