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Like so many issues in personal finance the answer to this question is "it depends." When considering a 401(k) plan there are several factors to consider. The bottom line answer is that you should be investing in a 401(k) plan, at least the maximum amount that your employer will match.

Yes, you heard me correctly, your employer will match money in your 401(K). This should be treated as what it is, free money. While there are several factors that determine how much you should invest in your 401(k) plan the first factor to consider is how much your employer will match.

In corporate America the average 401(k) matching plan is 50 cents to the dollar up to 5%. What this means is that for every dollar you invest your employer will match 50 cents into your account. They will continue to do this all the way up to 5% of your income.

In this example the minimum that you should even consider putting into your 401(k) is 5%. This ensures that you receive the maximum amount of free money. And who can honestly say that they would not like free money?

The many benefits of a 401(k) plan make it ideal for additional investments, even after meeting the maximum employer contribution rate. Tax-deferral, the fact that this money comes out of your gross income, the liquidity options (in the event of a *severe* emergency), the payout options, and the diversification all make a 401(k) the ideal retirement vehicle for most people.

Any additional funds beyond the employer match amount that you may be looking to put into a retirement plan should go into your 401(k), up to the maximum amount allowed (for most people this will be 20% of your income).

If looking for a tax deduction fund your 401(k) before funding an IRA or other retirement plan.

There is no easy answer to how much you should invest into your 401(k) plan, except to say that the minimum you should invest is the amount your employer will match. If you believe that you cannot afford to invest even that you are looking at this the wrong way.

You are not loosing 5% of your pay, you are gaining whatever your employer matches. And take into consideration that because this money is coming out from your gross income. Committing 100 dollars to your 401(k) does not mean that your pay will be 100 dollars less. Your pay may only be about 75 dollars less, add the employer match and you have a pretty favorable scenario:

Your pay has decreased seventy-five dollars while your retirement fund has increased one-hundred and fifty dollars. Sound good? I thought so.

Worst case scenario, investing in a 401(K) will mean free money and a reduction in your total tax liability. Not even to mention the accumulating retirment fund that you are building.

If your employer offers a 401(k) and you are not taking advantage of it enroll today!

Learn more about this author, Daniel Xiao Wang.
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