Personal Finance

I'm 30 and only make $35k a year - I should still contribute to a 401k even with such a low income?

Christy Bieber

Published: December 17, 2024 1:50 pm

Key Points from 24/7 Wall St.:

• A Reddit user with a limited income asked if making $60 monthly 401(k) contributions was worth it.
• A $60 monthly contribution actually reduces income by far less thanks to tax breaks.
• With the power of compound growth, a small contribution can turn into a large nest egg. 
• The best high yield savings accounts are paying way more than most Americans realize, with some are offering cash bonuses for new accounts. Click here to see our top pick today. ^(Sponsored)

Recently, a Reddit user asked an important question about 401(k) contributions. The poster said they’re in their 30s with a $35,000 per year job and are contributing only the amount needed to earn the company match. This amounts to a $60 monthly contribution. Their question was whether or not it was worth it to continue making the investment since they could use the money elsewhere. 

The question is a good one because many people without a huge income can’t invest a ton — and it may not feel worth sacrificing just to save a small amount. The question is also an easy one to answer. Here’s why. 

Any contributions to a 401(k) can help set you up for a secure future

Although it may seem frustrating to sacrifice to save a relatively small amount, the Reddit poster’s own question showed why it’s absolutely worth it. The Redditor said that he’s amassed around $10,000 in a target date fund with his contributions.  The fact that his $60 a month has already turned into a five-figure nest egg shows just how powerful investing can be. 

When you invest, you benefit from compound growth. Every dollar invested can earn returns. Those returns can then be reinvested, so the next time, you earn even more returns. This has a snowball effect, which is why the calculators at Investor.gov show that a $60 monthly 401(k) contribution will result in a total account balance of $195,137.55 if the money is invested over 35 years and earns a 10% average annual return. 

A retirement account worth almost $200,000 is a whole lot better than an account worth $0, which is what you’d have if you didn’t make whatever small monthly contributions you could afford. It would produce around $8,000 in income which could combine with Social Security to improve your standard of living. 

As if that wasn’t reason enough to keep investing, the Reddit user also said his company matches the money he’s putting away. If his company matches even 50% of his contribution, that brings his monthly investment to $90 a month. His nest egg after 35 years could be worth close to $300,000. The income that provides could mean the difference between a retirement skrimping to get by on Social Security alone and a comfortable future.

401(k) contributions don’t cost as much as you’d think

There’s another reason investing in a 401(k) makes sense even if you don’t have a lot of income. You get a tax break when you invest. You contribute with pre-tax dollars, so you don’t have to itemize on your taxes to enjoy this savings. If you’re in the 12% tax bracket, a $60 monthly contribution saves you as much as $86.40 annually off your tax bill.  Your take-home income won’t be reduced by the full $720 you invested each year, but by just $633.60 after accounting for the savings. 

With an income of $35,000, you’d likely also be eligible for the Saver’s Credit. This provides a tax credit worth 10%, 20%, or 50% of your contribution depending on income. For a single person earning $35K, the credit would likely be worth 10% of what they contributed while a married joint filer would get a 50% credit. Tax credits reduce your tax bill on a dollar-for-dollar basis, so if your credit is worth 50% of a $720 contribution, your total tax bill would be reduced by $360.  Your investment ends up reducing your take-home income by only $273.60 a year. 

A financial advisor can help you make informed choices about how much to invest, and about how to prioritize 401(k) contributions compared with other goals. However, between the saver’s credit, the employer match, the tax deductibility of your contribution, and compound growth, it’s clear that you can turn a small sum of money into an account that’s worth more than the $252,100 that Fidelity reports is the average 401() balance among those 70+. That is definitely worth doing.