How to Calculate 401(k) Contributions

Use your 401k to save for retirement.

Investing in a 401k plan at work is one of the best ways to save for retirement. The IRS provides workers with generous 401k contribution limits that allow those workers to put away a significant amount of money for retirement while sheltering those funds from current taxation. This can reduce your taxable income and your tax liability while allowing the money you set aside to grow tax deferred all the way until retirement.

Step 1

Decide whether you want to aim for the maximum 401k contribution allowed by law or invest something below that limit. The contribution limit for a 401k plan is quite generous. For 2010, workers can invest up to $16,500 in a 401k plan, plus an extra $5,500 if they are 50 years of age or older.

Step 2

Find your yearly income and use it to calculate how much of your salary you need to defer to reach the maximum allowable contribution. You can calculate your yearly wage by multiplying the gross pay on your most recent pay stub by the number of yearly pay periods.

Step 3

Check the matching contribution rules associated with your company's 401k plan. It is a good idea to contribute at least enough to the 401k plan to get the full matching contribution. Failing to contribute at least that much is literally like throwing money away.

Step 4

Review each pay stub you receive to keep track of your year-to-date 401k contributions. Your plan administrator should keep track of your contributions and suspend them when you reach the yearly contribution limit, but it is still a good idea to keep track of those contributions on your own.