Question

Research 401K retirement savings plan. Then, consider the following scenario. John Smith's Scenario John is single and he works at the XYZ company as a webpage designer. His annual salary is $75,000 a year. His company offers a 401K retirement savings benefit and it matches up to 6% of the participating employee's salary. John wants to participate in the program because it gives many benefits including that additional 6% money toward his retirement savings. He wants to figure out what amount would maximize his tax benefit and the company's match. He needs at least $2,300 per month for his living expenses. Suppose that you are his CFA. How much annual 401K contribution would you suggest to him? Explain your rationale for that suggestion.

Answer 1

A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered by many employers to their employees. Workers can make contributions to their 401(k) accounts through automatic payroll withholding, and their employers can match some or all of those contributions. The investment earnings in a traditional 401(k) plan are not taxed until the employee withdraws that money, typically after retirement. In a Roth 401(k) plan, withdrawals can be tax-free.

A 401(k) plan is a company-sponsored retirement account that employees can contribute to. Employers may also make matching contributions.
There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they're taxed.
In a traditional 401(k), employee contributions reduce their income taxes for the year they are made, but their withdrawals are taxed. With a Roth, employees make contributions with post-tax income but can make withdrawals tax-free.

Contribution Limits

First, it's important to know that the Internal Revenue Service (IRS's) sets annual limits on contributions. The elective deferral (contribution) limit for employees who participate in a 401(k) is $19,500 for tax year 2020.
There's a catch-up contribution for employees age 50 and over who participate in any of these plans. It allows for an additional $6,500 contribution in 2020

IDAL CONTRIBUTION
Depends on individual retirement goals, existing resources, lifestyle, and family decisions, but a common rule of thumb is to set aside at least 10% of your gross earnings as a start.
There is no ideal contribution to a 401(k) plan unless there is a company match. You should always take full advantage of a company match because it is essentially free money that the company gives you,