A 401K plan is your best bet to ensure compulsory savings from your salary while getting tax benefits and at the same time, getting a pension after your retirement.
This amount is taken directly from your salary. It is not considered for the purposes of calculating your income tax. It is taxed only when you make any withdrawals from it.
How Much Can I Contribute?
The contributions are considered to be pre-tax.
The IRS publishes a maximum amount of contribution for 401K plan, every year. This amount is decided by taking all kinds of economic factors into consideration. For example, the Cost of Living Adjustment (COLA). Thus, the limits are already decided for you.
Ideally, you can put anywhere between 10 to 15% of your salary. This amount can vary depending upon how much your employer allows you to contribute.
At any time, if you do get a raise in your salary, then you need to inform your employer if you want to increase the amount of your contribution. This is a very good idea if you want to increase your savings component along with your salary increase.
Your employer may also contribute in your plan in other ways, such as by giving you shares in the company equal to the value of his contribution.
The total contribution amount, thus includes any or all employee matching or profit sharing contributions and the post tax contributions made by you.
So it makes sense to see what your employer allows, and then seeing what the Government states as the maximum amount of contribution. You can then decide the amount you are comfortable with putting into your 401K plan per month.
Planning and Budgeting
It is always useful if you begin saving into your 401K plan as soon as possible. This makes sure that you have compulsory savings that will help you retire easy.
This account remains with you from the time you start working. So, it does not matter if you change your job. The savings are still there, and you can keep on adding to it.
Also, if there are no huge expenses coming up, then add as much as you can into this account. Imagine how putting away, say $100 per month, will add up to over a period of 10, or 20 years!
The more you save now, the faster you can retire a millionaire!