Editors' pick: Originally published Jan. 7.
The market's horrific sell-off this week is making a lot of investors nervous about the security of their retirement money. As you gird for a tumultuous new year, now's a good time to review a few common facts about 401k plans.
Over time, the effort you invest today can add up to thousands of dollars in your nest egg.
What are the limits to 401k contributions?
This question is trickier than it seems. You can't just determine the limit and then assume the ceiling is fixed. As with anything that involves the government, the rules continually change and you need to monitor them.
The maximum pretax contribution dollar amount is established by federal law and annually adjusted for inflation. The 2015 pretax contribution limit is $18,000.
How much should I contribute?
We advise the maximum, but that's easier stated than done. Not everyone can afford it. Strive for at least 15%-20% of your income during your earning years.
If your company is generous enough to offer a matching contribution, you should kick in enough to make the most of that match. For example, if your company matches $1.00 up to 10% of your contributions, you should contribute at least 10%.
Are there different ways in which employers offer a matching contribution?
Yes, your employer can choose among several methods for determining the percentage that it contributes. The most common are a fixed percentage of what you put into the plan; a predetermined percentage of your pay; and a discretionary percentage that's subject to change according to how your company is performing.
To reiterate: Make it a point to contribute at least the minimum amount required to trigger your company's full match. Otherwise, you're refusing free money. It's a wealth-building tactic that should be part of your long-term investment strategy.