Your 401(k) contributions should go toward low-cost, diversified investments that match your timeline to retirement, and you should contribute at least enough to capture your full employer match. Beyond that, the split between traditional (pre-tax) and Roth (after-tax) contributions, the specific funds you pick, and how much you set aside each paycheck all depend on your income, your age, and how hands-on you want to be. Here’s how to think through each piece.
Start With Your Employer Match
If your employer matches contributions, that match is an immediate, guaranteed return on your money. Matching formulas vary. A common structure is 50 cents for every dollar you contribute, up to 6% of your pay. Others match dollar-for-dollar up to 3% and then 50 cents on the dollar for the next 2%. Some plans match a flat percentage regardless of what you put in.
Whatever the formula, your first priority is contributing enough to get every dollar your employer will give you. If your company matches 50% of contributions up to 6% of your salary, you need to contribute at least 6% to collect the full match. Anything less is leaving free money on the table. Your plan’s summary document or HR portal will spell out the exact formula.
How Much to Contribute
For 2026, you can defer up to $24,500 of your own salary into a 401(k). If you’re 50 or older, you can add an extra $8,000 in catch-up contributions, bringing your personal limit to $32,500. Workers aged 60 through 63 get an even higher catch-up limit of $11,250, for a total of $35,750.
Maxing out isn’t realistic for everyone, and that’s fine. A widely cited guideline is to save 10% to 15% of your gross income for retirement, including any employer match. If you’re starting later, aim for the higher end. If you’re in your 20s and building an emergency fund at the same time, hitting 10% (or even just the match) is a strong start. You can increase your contribution rate by 1% each year and barely feel the difference in your paycheck.
Traditional or Roth Contributions
Many 401(k) plans let you split your contributions between traditional (pre-tax) and Roth (after-tax) buckets. The distinction matters because it determines when you pay taxes on that money.
Traditional contributions reduce your taxable income now. You pay no income tax on the money going in, but every dollar you withdraw in retirement, contributions and growth alike, gets taxed as ordinary income. Roth contributions work the opposite way: you pay taxes on the money today, but qualified withdrawals in retirement come out completely tax-free, including all the investment growth, as long as the account has been open at least five years and you’re 59½ or older.
The key question is whether your tax rate is higher now or will be higher in retirement. If you’re early in your career and earning less than you expect to later, Roth contributions lock in today’s lower rate. If you’re in your peak earning years and sitting in a high tax bracket, traditional contributions give you a bigger tax break right now. Many people split contributions between the two to diversify their tax exposure, which gives you flexibility to manage taxable income in retirement.
Choosing Your Investments
Your 401(k) plan offers a menu of funds, typically ranging from a handful to a few dozen options. The two most practical approaches are using a target-date fund or building a simple portfolio of index funds.
Target-Date Funds
A target-date fund is a single fund designed around the year you expect to retire. If you plan to retire around 2055, you’d pick a “2055 Fund.” The fund holds a mix of stocks and bonds and automatically shifts toward more conservative investments as your target date gets closer. You don’t need to rebalance or make any changes over time.
This is the best option if you want a hands-off approach. The average expense ratio for target-date funds in 401(k) plans was 0.29% in 2024, meaning you’d pay about $2.90 per year for every $1,000 invested. That’s reasonable, though it’s worth checking your plan’s specific fund. If you go this route, put 100% of your 401(k) into the single target-date fund that matches your retirement timeline. Splitting between a target-date fund and other funds can create overlap, since the target-date fund already holds a diversified mix.
Index Funds
If you’d rather control the mix yourself, index funds are the building blocks. An index fund tracks a broad market benchmark like the S&P 500 or a total stock market index, giving you exposure to hundreds or thousands of companies in a single fund. They’re passively managed, which keeps costs low. The average expense ratio for equity index funds in 401(k) plans was just 0.26% in 2024.
A straightforward DIY portfolio might look like this: a U.S. total stock market index fund for domestic exposure, an international stock index fund for global diversification, and a bond index fund for stability. How you divide among them depends on your age and comfort with risk. A common starting point for someone decades from retirement is 80% to 90% in stock funds and 10% to 20% in bonds, gradually shifting more toward bonds as you get closer to retirement. If your plan offers a total stock market fund, that’s generally preferable to an S&P 500 fund because it includes small and mid-sized companies, not just the 500 largest.
Watch Your Expense Ratios
The expense ratio is the annual fee a fund charges, expressed as a percentage of your balance. It gets deducted automatically, so you never see a bill, but it compounds over decades. The difference between a fund charging 0.05% and one charging 0.80% might seem small, but on a $500,000 balance that’s the difference between $250 and $4,000 a year in fees.
Look for funds with expense ratios below 0.30%. Most 401(k) plans offer at least a few low-cost index options. If your plan’s cheapest equity fund still charges north of 0.50%, it’s worth flagging to your HR department. Employers can and do switch plan providers when fees are out of line. In the meantime, still contribute enough to get the match, because even a mediocre 401(k) with an employer match beats most alternatives.
What to Avoid in Your Fund Lineup
Your plan may include actively managed funds with expense ratios of 0.75% or higher. These funds employ managers who try to pick stocks that outperform the market. The track record on this is poor: over long periods, the vast majority of actively managed funds lag their benchmark index after fees. Unless you have a specific reason to believe otherwise, you’re better off with the low-cost index options.
You may also see a “stable value” or money market fund. These preserve your principal but barely keep up with inflation. They make sense for money you’ll need within a year or two, but for retirement savings with a long horizon, they quietly erode your purchasing power. A 25-year-old putting their entire 401(k) in stable value is effectively choosing to fall behind.
Putting It All Together
Your 401(k) decision boils down to three choices: how much to contribute, whether to go traditional or Roth, and which funds to pick. At minimum, contribute enough to get the full employer match. Choose Roth if you expect your income to rise significantly, traditional if you’re in a high bracket now, or split between both if you’re unsure. For investments, pick a target-date fund matching your retirement year for simplicity, or build a two-to-three-fund portfolio of low-cost index funds if you want more control. Keep expense ratios as low as your plan allows, and increase your contribution rate whenever you get a raise.