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Year End Reminder: Change Your 401(k) Contribution Level Now

This article was written by in Investing. 16 comments.


At the end of the year, most people in the United States are thinking about the holidays and the potential credit card bills for gifts and family visits. One good way to control this potentially stressful month is to take some time to breathe and get your own finances in order. There are several actions you should consider and complete before the year ends in order to start next year on the best foot possible.

There is good news for everyone saving for retirement through a 401(k) account. The IRS has approved an increase in the 401(k) maximum. Anyone who is in a financial condition comfortable enough to maximize the contribution throughout the year will see an increase from $16,500 to $17,000 for the year. Savers age 50 or older qualify for an extra $5,500 in addition to the $17,000.

If you maximize your contribution, take the time now to contact your benefits department or visit your benefits website to change your deductions now. The change could take a few weeks to take effect, so if you want your changes to take effect for the beginning of the year, it’s best to start looking at the details now.

Winter SnowIn many cases, employers offer some time of matching contribution. For example, the company might match half of your contributions up to the first 6% of your salary you contribute or math all your contributions up to the first 3% of your salary. In the first case, to maximize your tax benefit and matching benefit, you’ll need to deduct 6% of your paycheck every period if 6% of your annual salary adds up to $17,000 or less (or $22,500 or less if you’re 50 years old or older). In the second case, you’ll only need to deduct 3% of each paycheck. If the optimal percentage would result in exceeding the government-mandated maximum, you’d have to determine the best percentage that prevents you from exceeding that threshold.

I found out recently that some employers offer a benefit, sometimes called something like “spillover protection.” If you contribute more than the IRS maximum, companies that offer this feature will allow you to continue deferring income to your 401(k), it would just be considered after-tax contributions. Most employers will automatically stop your contribution once you hit the limit, and if the employer matches your contribution on a per-paycheck basis, you’ll miss out on some matching contributions.

Employers may also have other contribution limits. It’s common for a corporation to say that the maximum contribution percentage is 50% of an annual salary.

Recalculating the 401(k) contribution at the end of the year is not a tactic just for those earning enough to maximize the tax benefit. If you received a raise or cost of living increase this year and haven’t adjusted your 401(k) deferment to match the extra cash flow, the end of the year is a good time to bump your contribution by one or two percentage points. Some 401(k) plans have options where the investor can initiate automatic investment increases each year. This is a good opportunity to turn this feature on or manually adjust your contribution.

This advice isn’t just for people working for a large corporation. Non-profit organizations often offer similar benefits called 403(b) plans, and if you’re self-employed, you may save for your retirement using an individual (or Solo) 401(k) plan.

Don’t wait. The process of changing your contribution can take a few weeks to take effect, so if you want to contribute a consistent percentage of your income throughout the new year, the sooner you make the change, the easier that will be.

Published or updated December 6, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 16 comments… read them below or add one }

avatar Dan

My employer will match 15% of my salary regardless whether I contribute or not…should I still contribute on my own? I’m 23.

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avatar Luke Landes ♦127,535 (Platinum)

That’s a great benefit. If you have good investment choices in the 401(k), I say you should, but if the choices are expensive or actively managed, I would probably suggest investing in a traditional IRA for a similar tax benefit and choose the investments you like. If you max out your IRA and still have the funds to invest for retirement, then you can go back to your 401(k). More information could lead to a more specific recommendation, and it helps to check with a financial planner (I am not one).

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avatar Dan

Hi,

Thanks for the response. My company pays all the managing and annual fees, and provides lots of choices so I’m fine just keeping everything with them.

I guess my question is more related to– how much is it too much to put into retirement?

I also have been fully finding Roth IRA for the past 2 years (which is nicely growing!), and will use my bonus to fund it for ’12.

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avatar Luke Landes ♦127,535 (Platinum)

You might be interested in reading this: Is it possible to save too much money?

The point of money is not to have a high bank balance when you die, it’s to use to provide yourself with choices in life and some modicum of freedom. Unfortunately, we live in a world where planning for the future is a necessity, though. You’ll need to find the right balance for you, between helping ensure a comfortable self-reliant life in the future with enjoying your life today. Don’t forget that every day you live could well be your last.

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avatar Eric

My company increased its match from 3% to 4%. I was already putting away 5% so I don’t have to make a change to take advantage. I was considering increasing it anyway, but I can’t afford the full amount right now. Instead, I am trying to put as much as I can in the 401(k) and max the Roth while paying down my student loans as fast as I can and still having enough left over to enjoy life.

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avatar krantcents

I changed mine just before my last 2011 check. It takes a month to take effect.

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avatar Steve Dupree

My company only allows whole percentages, so it can be tricky to get just the right percentage to max out both the match and the limit, right on the last paycheck of the year. Sometimes I have to change mid-year in order to do it.

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avatar Jenna, Adaptu Community Manager

Thanks for the reminder!

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avatar Briana @ Prairie EcoThrifter

Hopefully I’m able to find a job that will have a 401(K) matching program. I’m going to max it out for sure! I didn’t get a chance to at my last job, but I’m looking to contribute to an IRA in the mean time.

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avatar KC @ PsychoMoney

I miss those days of employer matching 401K’s. Good advise though to make all the needed changes before the year begins.

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avatar wylerassociate ♦162 (Cent)

thanks for the tip about the 401K increase. I’ll have to update my 401K contribution level now.

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avatar Financial Samurai

If only Congress could raise the contribution to a bigger amount i.e $50,000 pre-tax contribution. One cannot live off even $17,000/year contribution for 30 years in retirement comfortably if they don’t have help from Social Security and a pension. Need to save more than that!

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avatar Luke Landes ♦127,535 (Platinum)

The only reason I can deduce for having the limits is because without a limit, the tax benefit for people who earn very high salaries or who have major assets isn’t disproportionate. Say you earned $1,000,000 this year. Without limits of various types on 401(k) (as well as other tax safeguards in place), you could defer tax on $1,000,000 and live happily every after.

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avatar Cejay ♦1,521 (Half-Dollar)

My company matches up to 5% and I put that much into my 401k. I did raise my contribution level a little just because this is an easy way to save and I would like to retire at some point. The retirement age is fast bearing down upon me.

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avatar Luke Landes ♦127,535 (Platinum)

Great move, Cejay! Your future self will thank you.

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avatar Buck Inspire

Yay for the increase, but $17,000 a year still seems a little low. Thanks for the reminder!

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