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.
In 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.