No matter what sort of lifestyle you picture for yourself in retirement, one thing's for sure: You're going to need savings to live comfortably. While you will get some income from Social Security if you worked long enough, or are/were married to someone who qualifies for it, those benefits will only replace about 40% of your salary if you were an average earner, and most seniors need a lot more than that to cover their expenses -- hence the need for savings.

You have a few different options for saving for retirement in a tax-advantaged fashion. You could open an IRA and invest your nest egg there. But if you work for a company that sponsors a 401(k) plan, you have a great opportunity to sock away some serious funds for your golden years. That's because 401(k)s come with generous annual contribution limits -- much higher than those of an IRA -- and if you're able to max out your contributions, you can not only lower your immediate tax burden during your working years, but also accumulate more wealth than you might imagine.

401k written out in gold block characters on top of a wooden plank background


Traditional vs. Roth 401(k)s

A 401(k) is a retirement plan that allows workers to save and invest a portion of their earnings. In most cases, you need an employer to sponsor a 401(k) in order to participate in one, but if you're self-employed, you can open a solo 401(k) for yourself (read more on this below). The money in your 401(k) is yours to access once you turn 59-1/2; if you take an early withdrawal, you'll risk paying a 10% IRS penalty on the amount you remove.

The money you put into your 401(k) shouldn't just sit in cash; rather, you'll have the option to invest it in the funds your plan offers. Different plans offer different funds, but you'll generally get a mix of bond funds and funds that consist of stocks. Some of those funds will likely be actively managed with a person or team of people deciding how to invest the money, while others will be passively managed (like index funds, which track existing market indexes like the S&P 500). Passively managed funds generally charge lower fees than those that are actively managed, and fees are something to pay attention to when investing your retirement savings, because the higher they are, the less money you have to invest.

Employer-sponsored 401(k)s come in two varieties: traditional and Roth. Taxes are unfortunately unavoidable, but these two options do allow you some control over when you will pay the taxes: now (Roth) or later in retirement (traditional). Not every employer offers a Roth, but as of mid-2019, an estimated 70% of companies gave employees that option.

Traditional 401(k)s

With a traditional 401(k), the money you contribute goes in on a pre-tax basis. Keep in mind that you're not actually writing out a check; rather, funding for your account comes in the form of a payroll deduction that you sign up for. You then get to invest that money, and once you do, your investments grow on a tax-deferred basis until the time comes to take withdrawals, which are taxed as ordinary income (meaning, at the same rate that would apply to your regular paycheck).

Roth 401(k)s

Roth 401(k)s work the opposite way: Contributions are made on a post-tax basis, which means that you're funding your plan with money you've already paid taxes on. As a result, there's no immediate tax benefit involved. But once your Roth 401(k) is funded, your money gets to grow on a tax-free basis, and withdrawals in retirement are tax-free as well.

Traditional vs. Roth: Which one is right for me?

To determine which type of 401(k) is right for you, you'll need to think about when your tax burden is likely to be at its highest. If you're fairly new to the workforce, and your earnings haven't come close to peaking, then there's a good chance you'll be in a higher tax bracket in retirement than the one you're currently in. In that case, a Roth 401(k) makes a lot of sense. On the other hand, if you expect your tax burden to go down in retirement, then a traditional 401(k) may be the better way to go. 

You're allowed to access your 401(k) funds without penalty once you reach age 59 1/2; taking an early withdrawal could result in costly penalties. Also, both traditional and Roth 401(k)s impose what are known as required minimum distributions, or RMDS, starting at age 70 1/2. This means that down the line, you'll be forced to remove a certain portion of your account each year, the exact amount of which will depend on your plan balance and life expectancy at the time. If you have a traditional 401(k), you'll pay taxes on your RMDs. With a Roth 401(k), you won't.

Tax brackets aside, Roth 401(k)s offer the benefit of not having to worry about taxes on withdrawals in retirement. That alone might drive you to favor a Roth 401(k). 

Keep in mind that you're allowed to divvy up your savings between a traditional and a Roth 401(k). In doing so, you'll save some money on your taxes when you make contributions, but you'll also get the option to withdraw some of your savings in a tax-free fashion during retirement. 

401(k) contribution limits for 2019

The maximum amount you can contribute to a 401(k) can change from year to year based on adjustments by the IRS. For 2019, the contribution limits for 401(k) plans are $19,000 for workers under 50 and $25,000 for those 50 and over. The reason older workers get a higher cap on contributions is that they have less time until retirement, and those higher limits serve as a catch-up opportunity.

Note that these contribution limits are the same for both traditional and Roth 401(k)s. However, they also apply across both account types. This means that if you decide to put some money in a traditional 401(k) and some in a Roth 401(k), you can't contribute $19,000 or $25,000 (depending on age) to both accounts this year. You can only put in a total of either $19,000 or $25,000 of your own money for 2019. 

Age in 2019

401(k) Contribution Limit

Under 50


50 or older


As you can see, these are some pretty substantial limits, and because of the tax implications involved, you'll really need to weigh your options to see if a traditional 401(k) makes sense for you, or if a Roth is a better choice. If you're under 50 and you max out a traditional 401(k) this year, that's $19,000 of income the IRS can't tax you on. If that money falls into the 24% tax bracket, that's an instant $4,560 in savings. If you're 50 or older and max out a traditional 401(k) at $25,000 this year, at the same tax bracket, you'll shave $6,000 off your IRS bill.

It's for this reason that many people prefer traditional 401(k)s to Roth 401(k)s -- with traditional 401(k)s, you get the instant gratification of a same-year tax break. The only thing to keep in mind is that once you retire, the tax people will come knocking. If it sounds preferable to withdraw from your 401(k) in retirement without paying taxes, and especially if you expect to be in a higher tax bracket in retirement than you are now, then a Roth 401(k) makes sense.

Another thing you should know is that you're allowed to change your 401(k) contributions during the year. You might, for example, start out by having $1,000 a month withheld from your salary to go into your 401(k). Over 12 months, that would give you a $12,000 contribution, which is below the limit. If, come June, you shed some expenses and are able to ramp up to $2,000 a month, that's fine. You don't have to contribute the same amount to your 401(k) from each paycheck or pay period as long as you stick to the annual limits. The only thing you should know is that changes to your 401(k) contributions don't always take effect immediately; it can sometimes take several pay periods to see any requested changes you make go through.

Along these lines, if you start off the year saving in a traditional 401(k) and decide you'd like to switch to a Roth 401(k), you can generally do so by letting your employer know. At that point, your contributions will be deducted from your earnings on an after-tax basis. Or, as mentioned earlier, you can have some money deducted pre-tax and put into a traditional 401(k), and the rest of your contributions deducted post-tax and put into a Roth 401(k). 

Employer matching dollars

An estimated 63% of companies that sponsor 401(k) plans also match employee contributions to some degree, according to a recent survey by the Plan Sponsor Council of America. This applies to both traditional and Roth 401(k)s, and if your employer offers this perk, it's effectively free retirement money for you.

Employer matches can work in different ways, but companies will commonly agree to match your contributions up to a certain percentage of your salary. For example, your employer might agree to match contributions of up to 3% of your salary. If you earn $50,000 a year, that means your company will put $1,500 into your 401(k) provided you contribute the same amount out of your own paycheck.

Note that you can contribute below your company's maximum match and still get something. For example, if you're only able to contribute $1,000 in our previous scenario, you'll still get $1,000 in matching dollars from your employer. That said, it pays to put in enough of your own money to snag your employer match in full, because if you don't, you're effectively throwing free cash down the drain.

Furthermore, the additional money your employer puts into your 401(k) doesn't count toward your annual contribution limit. The $19,000 and $25,000 figures referenced above represent the annual withholding limits from your salary for 401(k) purposes. If you're 30 and you contribute $19,000 to your 401(k) this year, and your employer puts in another $3,000 on top of that, that's OK! 

Solo 401(k) contribution limits for the self-employed

You might think that if you're self-employed, your only retirement savings option is an IRA. But, actually, if you work for yourself, you can open a solo 401(k).

As the name implies, a solo 401(k) is one you manage yourself. You can open one through a financial institution that houses other investments of yours, or through a new one. Since there are fees associated with opening and maintaining such an account (as is the case with traditional and Roth 401(k) plans, too), it pays to shop around for the best deal. In some cases, you might pay $100 to set up your 401(k) and a $25 monthly maintenance fee. In other cases, you might find a solo 401(k) that doesn't charge a setup fee at all, and has a more competitive monthly fee. Keep in mind that we're talking about administrative fees here -- the fees you pay on your investments will be a function of the specific funds you choose.

The great thing about a solo 401(k) is it comes with a much higher contribution limit than a traditional or Roth 401(k). For 2019, you can contribute up to $56,000 into a solo 401(k) if you're under 50. Like traditional and Roth 401(k)s, if you're 50 or older, you get a $6,000 catch-up for your solo 401(k) as well, bringing your total possible contribution up to $62,000.

That said, you may not be eligible to max out your solo 401(k). Funding for your solo 401(k) can come from two sources -- the salary you pay yourself (if you're self-employed and own a registered business) and your net self-employment or business income ( your business income minus half the amount you pay in self-employment taxes). If you don't pay yourself a salary, you're only looking at the latter. You're allowed to contribute up to 20% of your net self-employment income to your solo 401(k), but if you only bring in a total of $100,000, you clearly won't get to max out at $56,000 or $62,000.

On the other hand, if your income is high enough, you can contribute up to $56,000 or $62,000 from your net earnings alone. If you own a business and pay yourself a salary, you can contribute up to $19,000 or $25,000 from that salary, but in that case, you'd only be eligible to contribute another $37,000 from your net business income to max out. You can't put in $56,000 or $62,000 from your business income and then add another $19,000 or $25,000 from your salary.

Furthermore, if you have access to both a 401(k) through an employer and a solo 401(k) -- say, from a business you run on the side -- you can still only contribute a total of $19,000 (assuming you're under 50) from salary, and that includes the salary your employer pays you as well as the salary you pay yourself from your business. The rest of your solo 401(k) contributions will have to come from your business income. 

What happens if you exceed the 401(k) contribution limit?

Many workers struggle to get close to maxing out their 401(k)s. But what if the opposite happens to you? What if you wind up putting in more money than you're allowed to?

If that's the case, contact your 401(k) plan administrator as soon as possible -- ideally, before the upcoming tax filing deadline -- and explain that you've made what's known as an "excess deferral." Your plan administrator is then obligated to return those extra funds to you. At that point, if you funded a traditional 401(k), you'll be liable for taxes on that additional sum.

If you overfund your 401(k) in 2019, you have until the 2020 tax deadline to correct that error. If you don't address your mistake in time, you'll risk paying taxes on that overage in 2019. But, you'll also risk paying taxes on that excess amount when you take withdrawals from your 401(k) in retirement, assuming you have a traditional 401(k). 

Now you may be thinking: "How would someone ever wind up contributing too much to a 401(k)?" But actually, it can happen pretty easily.

Many companies have employees elect a percentage of salary to allocate to their 401(k)s rather than an actual dollar amount. For example, if you earn $100,000 and want to max out your 401(k) this year, you'd indicate that you want to defer 19% of your salary. But what happens if you get a raise midyear? If you don't lower that election, you'll end up overfunding your 401(k).

The same thing might happen if you switch jobs during the year. You might lose track of how much you contributed to your first employer's plan and elect too high a number or percentage when you sign up for your new employer's 401(k).

The takeaway? Keep tabs on your 401(k) contributions for the year. Your pay stubs should track how much you've contributed to date, so if you see that you're getting close to the annual limit well before the end of the year, consider it a wakeup call to talk to your payroll department.

Ramping up your 401(k) contributions

The more money you're able to put into your 401(k), the larger a nest egg you stand to retire with. Remember, the funds you put into your 401(k) have the opportunity to grow even more with compounding, so the more you contribute, the more those investments can pay you.

Take a look at the following table, which shows how much your 401(k) balance would grow with a 7% average annual return over 40 years.

Monthly 401(k) Contribution

Total Accumulated Over 40 Years (With a 7% Average Annual Return)




$1.437 million


$2.156 million


$2.874 million


$3.593 million


All of the above numbers are impressive in their own right, and none of them entail maxing out a 401(k) at this year's limits (though $1,500 a month comes pretty close for workers under 50). And if you're wondering about the 7% return utilized for those calculations, it's actually a couple of percentage points below the stock market's average. If you load up on stock-focused funds, there's a good chance you'll see that level of return or higher over a lengthy investment window (which the above table assumes to be a 40-year span). 

Even though a 401(k) worth $719,000 (a $300-per-month contribution in my table) is nothing to scoff at, it's a far cry from $1.437 million (a $600-per-month contribution in my table), and the increasing figures that follow it down that table. The point is that while contributing some amount of money to your 401(k) is a great way to ensure that you have adequate savings for retirement, it pays to get as close to maxing out your 401(k) as you can.

Tricks for maxing out your 401(k)

  • Invest raises: One easy way to get closer to maxing out your 401(k) is to automatically send your raises into your plan. The logic is that you won't be used to having that extra money, so you shouldn't miss it when it lands in your retirement plan rather than your checking account.
  • Reduce spending: Another option is to cut back on spending so you're able to allocate more of your current salary to your 401(k). To this end, having a budget really helps, because it'll allow you to see where your money is going and where there may be room to reduce your expenses. If you're serious about contributing more to your 401(k), you might choose to slash a couple of big bills, like your rent or car payment. If you're not willing to make drastic lifestyle changes, then smaller ones, like cutting back on restaurant meals and leisure, will help, too. In fact, if you were to contribute $100 a month above what you're already putting into your 401(k) over a 40-year period, you'd have an extra $240,000 for retirement, assuming we apply the same 7% return used above. Even a few modest adjustments to your budget that free up that $100 a month are worth doing for the outsize returns.
  • Supplemental income: Another option? Get a side gig. If you're able to supplement your income with a second job, you'll be able to allocate more to your 401(k).

If you're really struggling to part with any amount of your salary, at the very least, aim to put in enough to snag your full employer match. You can always start small and boost your contributions as your circumstances change and your income grows.

Remember, though, that the sooner you start contributing to your 401(k), the more wealth you stand to build. The table above assumes a 40-year savings window, but watch what happens if we cut that time in half, assuming only 20 years left until retirement:

Monthly 401(k) Contribution

Total Accumulated Over 20 Years (With a 7% Average Annual Return)












You can't help but notice what a difference those 20 years make, which is why it's so important to start funding a 401(k) as early as possible.

Know your limits

If your goal is to max out your 401(k) from year to year, remember that annual contribution limits can change from year to year. Here's how those limits recently evolved:


401(k) Contribution Limit if Under 50

401(k) Contribution Limit if 50 or Older













Notice that 401(k) contribution limits don't always go up (though the catch-up amount has held steady at $6,000 for quite some time). The best thing you can do is read up on 401(k) changes around the December-January time frame and make adjustments to your account as you see fit. You can check the IRS' website for this information, or ask your plan administrator to confirm what the limits are. Remember, there's a good chance 401(k) contribution limits will increase for 2020, and if your goal is to max out, you'll need to stay current and change your payroll elections accordingly.