What to know about retirement contributions

Building a secure retirement starts with consistent contributions to your retirement plan. Whether you're early in your career or approaching retirement age, knowing how contributions function can help you maximize your long-term savings. In this guide, we’ll explore what contributions are, how they benefit your retirement strategy, and the various types you might be eligible to make.

What are contributions?

Contributions are the funds you regularly set aside in your retirement account to help build your retirement savings. You decide how your contributions are invested by making selections from the options available in your plan. As you continue to contribute, you build your retirement savings gradually over time. When your investments earn money, those earnings are reinvested in your account to help you earn even more. This process is called compounding, and it’s a powerful way to grow your savings over the long term.

How do contributions work?

You decide how much to set aside from each paycheck to go into your retirement account. Depending on your plan, you can choose a fixed dollar amount or a percentage of your pay. You’re free to adjust your contribution amount whenever needed. If your plan offers it, money can be automatically taken from your paycheck and invested based on the selections you’ve made. Each year, the IRS sets a limit on how much you’re allowed to contribute, which helps guide your savings strategy.

How much should you contribute?

The amount you’ll need for retirement depends on several factors, like your target retirement age and the lifestyle you want to maintain. A planning tool such as My Retirement Goals tool can help you estimate how much you might need in retirement based on your personal situation. It also allows you to monitor your progress and make adjustments along the way.

No matter how much you can contribute right now, the most important step is to begin. Time plays a major role in how your savings grow. Thanks to compounding, even small contributions can add up significantly over the years. Starting early gives your money more time to work for you, and you can always increase your contributions later.

What types of contributions can you make?

There are different ways to contribute to your retirement account, and your plan may offer one or more of the following options. To understand what’s available and whether you’re eligible, check your plan details or speak with a financial professional.

• Pre-tax contributions
  This traditional option allows you to contribute money before taxes are taken out. It lowers your taxable income now, and you’ll pay taxes later when you withdraw the money during retirement.
  
  
• Roth contributions
  With Roth contributions, you pay taxes on the money before it goes into your account. If certain conditions are met, your withdrawals in retirement will be tax-free. This option may be a good fit if you expect to be in a higher tax bracket later or exceed income limits for contributing to a Roth IRA. Not all plans include Roth options, so be sure to review your plan to see what’s offered.
  
  
• Matching contributions
  Some employers contribute additional money to your account by matching a portion of what you save. These matches can help your savings grow faster. To make the most of this benefit, try to contribute at least enough to receive the full match.
  
  
• Catch-up contributions
  If you’re age 50 or older, you may be able to contribute more than the standard IRS limit. To learn more about catch-up contributions, check out our article Boost your retirement savings.