Contribution

What is a 401(k) contribution? 

A 401(k) contribution, also called an elective deferral, is the amount of money you choose to save from your paycheck and put into your employer-sponsored 401(k) retirement account. By making these contributions, you are actively putting your money to work for your future.

When you review your paystub, you might notice a specific line item deducting money from your earnings. If you recently enrolled in your company's retirement plan, this can be a 401(k) contribution.

How do 401(k) contributions work?

Once you set your contribution rate (either a flat dollar amount or a percentage of your salary), the money is automatically deducted from your paycheck each pay period. If your employer has a seamless integration with a human capital management (HCM) system or their payroll provider, this can help make it easier to build a consistent investment habit.

• Contribution limits: The IRS places limits on the maximum amount you can contribute each year. Read more about the maximum amount you can contribute to your 401(k).

Why do 401(k) contributions matter? 

Making regular contributions to your 401(k) can be one way to build up your retirement portfolio. Here is why it matters:

• Tax advantages: 401(k) contributions provide significant tax benefits. If you choose a traditional 401(k), deferrals are made pre-tax, which reduces your current taxable income for the year. If you choose a Roth 401(k), deferrals are made after taxes are withheld, but you can withdraw the money in retirement without paying income tax, provided certain requirements are met.