How to Set Up a 401(k): A Step-by-Step Guide

[ad_1]

Fact checked by Suzanne Kvilhaug

You've started a new job and your company offers a 401(k) plan, an employer-sponsored retirement savings plan. This is a great opportunity to save for retirement. Here are the steps you need to take to get your 401(k) off the ground.

Key Takeaways

• A 401(k) plan is a retirement savings plan sponsored by your employer.
• In 2025, most workers can contribute up to $23,500 to their 401(k) plans, and workers older than 50 can contribute an extra $7,500.
• As a general guideline, it's a good idea to contribute 10% to 15% of your salary if possible.
• Some employers offer a contribution match, which can boost your retirement savings.
• Choose your investments wisely—stock funds are riskier but offer more growth, while bond funds are more conservative.

Step 1: Get Enrolled

You may not need to do anything to get on your employer's 401(k) plan. "Employers these days tend to auto-enroll new employees into the 401(k) plan, while giving them an option to actively opt out if they so choose," says Carla Adams, founder and financial advisor at Ametrine Wealth.

If you are not auto-enrolled, you'll need to take a few steps to sign up.

"This usually involves filling out forms, either online or on paper. You'll need to provide basic personal information such as name, address, date of birth, Social Security number, and beneficiary," says Carl Holubowich, certified financial planner at Armstrong Fleming & Moore. "Don't delay signing up, as the sooner you start contributing, the more time your money has to grow through compound interest."

You may also have a choice of plans. Many companies allow employees to choose between a traditional 401(k) and a Roth 401(k). With a traditional 401(k), you make contributions using pre-tax dollars and lower your taxable income in the current year. Contributions to a Roth 401(k) are taxed, but your withdrawals in retirement are tax-free.

"Keep in mind you don’t have to choose 100% pretax or Roth contribution, you can split them between both options," Holubowlich says.

Step 2: Choose Your Contribution Amount

The next step is to decide how much you want to contribute each pay period. You can invest a percentage of each paycheck or a fixed dollar amount. Take a close look at your current budget and decide how much of your salary you can save.

"Start with a percentage you are comfortable with, even if it's small, and increase it over time," Holubowich says. "The good thing about selecting a percentage rather than a dollar amount is the amount you contribute will increase whenever you receive a bump up in salary."

But the more you can save, the more you will be able to enjoy in retirement. "Ideally you want to be contributing 10 (to) 15% of your pay to your 401(k), though this number can include any employer matching contributions," Adams says.

If your employer offers a matching contribution, that's another opportunity to grow your savings. Let's say an employer offers a 3% matching contribution. When you contribute 3% of your salary to a 401(k) your employer will contribute 3% of your salary as well, doubling your retirement savings.

Important

For tax year 2025, the maximum contribution for most workers is $23,500. If you are over age 50, you can make an additional catch-up contribution of $7,500 for $31,000 total.

Step 3: Choose Your Investments

A 401(k) plan includes a variety of investments, including stock funds, bonds, and target date funds. The investments you choose will depend on how close you are to retirement and your capacity for handling volatility in your investments.

"Employees are typically automatically set up to be invested in a target date fund, which is a great set-it-and-forget-it investment option that I believe makes sense for most people," Adams says. 

"However, you do have the opportunity to choose from a whole list of investment options. Younger employees should ideally be invested heavily in stock funds, whereas it is typically more appropriate for employees closer to retirement to be invested in a mix of both stock and bond funds." 

The investments in target-date funds become more conservative as the investor's target retirement date approaches. If this type of fund sounds too conservative, you have options.

 "If you have a higher risk tolerance and want the convenience of a target date fund, you can combat the conservative investment allocation by selecting a target date 5 (to) 15 years later than your actual target retirement date," advises Samantha Mockford, a certified financial planner at Citrine Capital.

You should also consider the expense ratio—the annual fee each fund charges to pay for management and administration. "Checking the expense ratio on the investment options is key and often overlooked," Adams says. "Opting for lower cost funds will keep more money in your pocket and benefit you greatly over the long term."

Take the time to review your 401(k) investments a couple of times a year.

"Some plans automatically rebalance your portfolio, but others require you to adjust it yourself," says John Abernethy, director of financial planning at Together Planning. "Check in once or twice a year to ensure your investments are still aligned with your goals and, if needed, rebalance or increase your contributions."

The Bottom Line

Enrolling in a 401(k) plan is easy, and many employers automatically enroll their employees. Try to contribute as much as your budget allows, especially if you can get a matching contribution from your employer. The more you save, the more you will have to enjoy your retirement.

[ad_2]

Source link