When signing up for a 401(k) plan, you might be tempted to contribute the maximum amount allowed. While it may be tempting to max out your contribution, unforeseen financial changes may require you to adjust your savings rate. This post will cover the flexibility of 401(k) contributions, including how and when to modify your contributions and the potential impact of these changes.
Why Contribute To A 401(k)?
A 401(k) is an employer-sponsored retirement account that allows you to save for retirement in a tax-advantaged way. When you contribute money to a 401(k), it comes out of your pre-tax income, which means your taxable income goes down. You don't have to pay taxes on the money until you withdraw it at retirement age. This can help reduce your current tax bill and give you more money to invest in retirement. Many employers offer matching contributions when employees sign up for a 401(k). Catch-up contributions are also allowed if you are age 50 or older.
How Do You Change Your Contribution?
If you want to change your 401(k) contribution, you can do so before the deadline set by your employer. Fill out a 401(k) contribution form and indicate the amount you wish to contribute each pay period. You can increase or decrease the amount based on your budget. Note that your employer may match a percentage of your contribution.
The benefits of changing your 401(k) contribution include having more control over how much money you invest in retirement. For example, suppose you receive a raise or bonus and want to invest more in retirement savings. In that case, increasing your contributions before next year's enrollment period begins is easy. Additionally, if financial hardship hits and you need more cash flow in the short term, reducing your contributions can help.
Are There Any Downsides To Changing My Contribution?
Changing your 401(k) contribution can affect how much money you have available for other things. For example, if you reduce your contribution or stop contributing entirely, you'll have more immediate cash flow but will miss out on the benefits of compounding interest that come with investing long-term in a 401(k). Additionally, some employers may only offer matching contributions when employees maintain a certain level of 401(k) contributions. If you lower your contribution below that amount, you could miss out on free money from your employer. Maximum contribution limits may also apply if you increase your contribution amount.
What Are Some Things To Consider Before Making A Change?
Before changing your 401(k) contribution, it's important to consider how it could affect your retirement savings. If you are increasing or maintaining your contribution, make sure it is an amount you can comfortably afford and won't cause financial hardship. If you are reducing or stopping contributions altogether, weigh the benefits of having more cash flow now against the potential costs of missing out on long-term investment gains through compounding interest.
Ultimately, deciding how much to contribute to a 401(k) is a personal decision and should be based on your financial situation and retirement goals. Make sure to factor in all the pros and cons before making any changes to make an informed decision about the best choice for you.
How Much Should You Contribute To Get The Most Out Of Your 401(k)?
The amount you should contribute to a 401(k) depends on your financial situation and retirement goals. Many financial advisors recommend contributing at least 10-15% of your pre-tax income, but it also depends on how much you need for other expenses like bills and living costs. The contribution amount should also consider any employer match or catch-up contributions that might be available.
Additionally, some employers have matching contributions when employees reach a certain level of contributions, which can be a great incentive to put more money into the account. Ultimately, the answer to this question will depend on what works best for you and your budget.
What Happens If I Go Over The 401(k) Contribution Limit?
If you contribute more money to your 401(k) than the IRS allows, there can be significant consequences. The excess contributions will be disallowed, and you won't receive tax benefits or credit for those funds. You'll also be required to withdraw the excess contributions and pay income taxes on them. If you don't withdraw the excess funds by April 15 of the following year, you may also incur a 6% excise tax penalty.
Going over the contribution limit won't help make up lost retirement savings due to market declines or other factors. Therefore, it's essential to avoid mistakes with your 401(k) contribution limits. Pay attention to income guidelines and maximum allowable amounts from year to year to ensure you're within the limit and avoid any unwanted consequences.
Final Thoughts
The ability to change your 401(k) contribution at any time is a great way to make sure that you are investing in retirement in a way that works for you and your budget. However, it's important to consider the pros and cons before making any changes and understand how they could affect your retirement savings. Additionally, stay within the IRS annual limits to avoid penalties or excessive taxes. With careful planning and consideration, you can ensure that your 401(k) contributions are working hard for you now and helping you save for a more secure future.
If you're unsure about how much you should be contributing to your 401(k), a Bolder Money coach can help. With our guidance and expertise, we can assess your financial situation and recommend a strategy that works for your budget and retirement goals.
