If you were at a loss, as I was, about the basics of a 401k when you had the option of first starting one up, let this post be your guide. I make some recommendations in here, but take no responsibility for their 'soundness' - I am not a personal financial planner (but I am a good deal cheaper!).
How Much can I contribute?
For this year, assuming you are not old enough to make catch-up contributions, you can contribute $15,500 as employer contributions.
How much should I contribute?
This question is a bit more tricky. You have to manage how much you want to contribute versus your other goals. I can tell you I contribute a percentage of my salary that maxes out my contribution each year. If your company matches, I strongly suggest at least contributing as much as needed to completely attain their match. I would suggest that you also consider not contributing too much and not being able to maintain a cash reserve fund for emergencies. If you think you can deal with 10% (and believe me, you can!), I'd start with that and adjust based on your needs. In a future post, i'll get into more advanced logic for structuring dollars between 401k and IRA, but the point here is to start saving now and build your strategy progressively.
What about this roth versus traditional option?
This is a controversial topic. There are tax advantages today for contributing to a traditional 401k - it lowers your taxable income for the year by the amount you contribute. Roth has the tax advantage deferred. You pay tax on roth type contributions now, and in turn don't pay any taxes when you withdrawal the funds at retirement (which you do have to pay when you withdrawal from a traditional 401k). If you need cash now, or think that (and believe me it's anyone's guess) that you'll be in a lower tax bracket when you retire, then a traditional account makes sense. I personally contribute to both and here's why. When I retire, I want to pull some money each year from a traditional account and some from a roth. This should (I believe) allow me to claim a very low amount of taxable income for the year, as the traditional amount would be the only amount I have to pay taxes on. This should guarantee myself a lower tax bracken in the future regardless of governmental tax rate changes. I feel I've essentially mitigated the gamble of tax bracket changes by contributing to both.
Once I choose how much to put in, how do I determine what 'fund' the money should go in?
No one knows. General advice is to diversify and choose low fee/no load options. If you have no clue, you can always choose the fund with a date on it that corresponds to the year nearest your goal retirement date, as it will change the amount of risk as time goes on - less and less risky investments as retirement date nears.
There are many calculators out there. Run any of them and it's apparent that savings for a 401k as long as it doesn't financially put you in a position to take out credit card debt, makes great sense - especially starting early.
