401k is a salary deferral retirement plan under IRS Code Section 401(k), the plan allows you to contribute part of your salary into the 401k, which the money can only be use upon your retirement. However, you are thinking how much can I contribute to my 401k? As an employee, your contribution to 401k is not subject to income tax but is subject to social security and medicare taxes. The 401k salary deferral will only be subject to income taxes when you withdraw the money from the plan and it does not reach the timely 401k rollover. However, there are also some states that do not tax any type of retirement distribution regardless the time when are they received.
The 401k plan will define your rights of your contributions on the written document, make sure that you read thoroughly as all 401k plans are different as to these options. It is advisable that you read up a bit about investing, if you have no idea about it. When investing the 401k retirement money it is advisable that you to should be cautious and not too aggressive. You should invest it in money market funds, stock funds, mutual funds or maybe capital stock of your employer. However, investing too much in the capital stock of your own employer is always not a good idea.
If you are wondering how much you can contribute to your 401k plan, the rule of thumb would be to contribute as much as possible every year. This way, you will be able to decrease your current income taxes and it will help you to save for your retirement. If your employer has a 401k matching plan, it will be very good for you as your employee will match your contribution every year, which means extra money when you reach your retirement age.
You can also choose to defer a portion of your salary and deposit it into your employer’s 401k plan. It is a win-win situation, as your employer’s 401k plan will have higher capital for investment, which will generate higher returns for you and if your employer match your portion of salary deferred, it will become income tax deduction for your employer.