Q: With the stock market going up I’ve heard it’s smart to max out your 401k. I have a 401k with a small employer match and right now I’m contributing 1% of my salary. What does it mean to “max out” a 401k and should I do it?
A: Maxing out your 401k means contributing the maximum dollar amount permitted by the plan for the current year. This is either 100% of your employment income or $16,500 for 2009, whichever is less. If you’re unable to contribute the full $16,500 then you should at least contribute enough money to take full advantage of your employer match. An employer match works just like it sounds. It’s extra money that your employer agrees to match on top of your 401k contribution. This means free money for you and it’s something you can’t afford to pass up. But keep in mind, each 401k plan is different and some employers don’t offer any match at all. You should check with your HR department or plan administrator to find out what your 401k match is and try to contribute at least that amount.
If you’re currently contributing 1% of your salary, it may not be realistic for you to increase your contributions to “the max” of $16,500 this year. Try increasing your contribution to the level of your employer match, instead. Even a small increase will have a significant impact on your account value over the long run. Remember, saving for retirement is not an all-or-nothing decision. You don’t want to fall into the trap of thinking that just because you can’t max out your 401k you shouldn’t bother contributing at all. By raising your contribution to even 3% you’ll be able to let your investments grow tax-free and the compounding effect will put real dollars into your pocket to spend during retirement.