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My employer allows me to contribute a certain percentage of my salary to my 401(k). My employer will also match a certain portion of my percentage. How much should I invest in my 401(k)? Should I invest the maximum or should I invest less and use the money to invest outside of my 401(k)?

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up vote 10 down vote accepted

A good general rule is to save 15% of your income for retirement. As for where you put it:

  1. Put as much as it takes to maximize your employer match into your 401(k), but no more. The employer match is free money, and you can't beat free money

  2. If you still haven't put in 15%, put the rest into a Roth IRA. By historical standards, taxes are pretty low today. They are almost certainly going to be higher in retirement, especially since you likely won't have the deductions in retirement that you may have now (kids, mortgage, etc).

  3. If you've maxed our the allowed contribution for your Roth and still haven't saved 15%, put the rest in a traditional IRA.

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+1 Good bullets. Also worth keeping in mind that (at least in my experience) fees in your 401k will be higher than you can get in a Roth. And choice will be better in a Roth and worse in a 401k. For example at a previous employer we had maybe 30 funds to choose from, almost all had fees well over 1.5%. In a Roth at an online brokerage, you can choose from (probably too many) funds, many with fees under 1%. – bstpierre Aug 5 '10 at 0:37
@bstpierre - very true. The fees on my wife's 401k are downright criminal (1.5% + 1% "management fee") – Eric Petroelje Aug 5 '10 at 20:59
I'm unsure about point 2. After retirement you often have far less expenses (no kids, no mortgage, no commute to work, etc) and thus require less income to maintain the same standard of living. This places you in a lower tax bracket so that even if average taxes are higher in the future, yours likely will not be. – Nicholas Aug 29 '14 at 12:53

At the very least you should invest as much as you can that your employer will match, as they are basically giving you free money for saving. After that I would prioritize a Roth IRA as that offers similar tax benefits with more liquidity. Provided you have enough money available in your emergency fund and have plenty for everyday expenses I see no reason not to max out your 401k after that if you can afford it. However, if your emergency fund is lacking, be sure to put some there. Other investments like a 529 may come into play if you have kids you plan on sending to college, but it all depends on your situation.

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If you can afford to put money in your 401(k) account, I would say at least you should invest enough to get your employer's matching fund. It's free money, why not get it?

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