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Should You Put Additional Money in Your 401(k) Plan?


SUMMARY: Should you put additional money in your 401(k)? The short answer is yes. But be mindful of your retirement goals, employer’s vesting schedule and annual contribution limits.

The short answer is yes, up to a point. If your employer matches your contributions, it’s a no-brainer to put in as much as your budget permits until you reach the maximum allowed by the IRS. To do otherwise lets free money float downstream, never to be seen again.

But what happens if you hit that ceiling? And what do you do once you’re fully vested?


Your 401(k), by the numbers

The most you can put into your 401(k) in 2019 is $19,000 (up from $18,500 in 2018). If you’re 50 or older, bump that up to $25,000 (up from $24,500 last year). Anything your company contributes is above and beyond that.

In a perfect world, if you dropped $19,000 into your 401(k) annually for 35 years, a 6 percent average annual return would put you in the ballpark of $2.4 million, not including any employer contributions.

These numbers can be a steep hill to climb for many workers who don’t have a lot of money left to invest after they deal with monthly expenses. But they are the stars you shoot for, putting in as much as possible now and increasing it every year. Anything you can do brings your dream retirement that much closer.

And you may not, in fact, need multimillions in order to have a comfortable, happy retirement. But doing all you can to max out your 401(k) is a solid strategy no matter how reserved or ambitious your plans for life after work may be.

How much should I have saved?

A 25- to 34-year-old who earns a salary of $66,470 should have that same amount put away for retirement. If you’re a 35- to 44-year-old, you need to seriously up the ante to three times your average income of $92,576, which leaves you with $277,728.

Your 401(k) is an essential tool for keeping up this pace. A bank account or money market fund simply won’t cut it, with their low interest and ties to inflation. Luckily, there are ways to take the pressure off, chief of which is automatic contributions, which allow these tax-free funds to jump from paycheck to retirement account without your lifting a finger. Ideally, you’ll want 10 to 15 percent of your annual income going toward your retirement nest egg.

When should I stop contributing?

At a certain point, your employer will stop chipping in money toward your retirement, as per a timetable known as a vesting schedule. The vesting schedule determines the length of time you’ll need to wait until all annual company contributions—usually 25 to 33 percent—are yours to claim. The longer your service, the more company funds will transfer to you.

If the vesting schedule is five years, then your employer puts in 20 percent of its funds each year. If you part ways before that (either of your own accord or forced out), you’ve lost that remaining matching money. Therefore, if a shiny new job opportunity comes your way, it’s worth checking your current employer’s vesting schedule to see how far you are from the finish line. If you’re less than a year out, perhaps consider waiting until you’ve claimed the entire match.

Once you become fully vested, it may not make financial sense to continue 401(k) contributions, because there is no more matching money and you’re still subject to account fees. But this doesn’t need to be the end of retirement savings.

How can I keep saving?

Once you’ve maxed out your match, there are a number of other options that can keep building your retirement fund:

  • Traditional or Roth IRAs are useful tools for safely storing retirement funds. Contribution limits are significantly lower—$6,000 a year; $7,000 if you’re 50 or older. But as is the case for your 401(k), the money is tax-free until you retire.
  • Health Savings Accounts (HSAs) can be used as tax-deductible retirement income toward medical expenses if you participate in a high-deductible insurance plan.
  • Taxable investment accounts can be useful supplements to your 401(k), IRA or HSA because they are not held back by any annual contribution limits, saving thresholds or required minimum distributions.

Your 401(k) is just the beginning

So, should you put additional money in your 401(k)? Yes, but be mindful of your retirement goals and employer’s vesting schedule. Contribute as much as you can, up to the $19,000 yearly limit, to take full advantage of any employer match. Do that until you are fully vested. At that point, your money is likely better served in alternate vehicles such as an IRA, HSA or other investment account.

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