Can I Change My 401(k) Contribution at Any Time?

Saving for retirement is a vital component of broad financial planning. Understanding the flexibility and options available for adjusting your 401(k) contribution levels is crucial to making the most of your retirement fund.

For those who aren’t familiar, a 401(k) is a tax-deferred retirement savings plan offered by employers, allowing you to contribute a portion of your pre-tax salary to a tax-deferred retirement account.

You might want to change your 401(k) contribution rate for many reasons, such as income fluctuations, family circumstances, or simply wanting to boost your retirement savings. Knowing the rules and options available to you is important so you can make informed decisions about your future.

In this post, we’ll explore when and how you can adjust your 401(k) contributions and what factors to consider before making changes.

Understanding the Rules and Timing for Adjusting 401(k) Contributions

If you’re looking to change contribution amounts, it’s important to have a clear understanding of some key questions.

Let’s explore some essential factors you’ll need to know to adjust your employee contributions.

When Can You Change Your 401(k) Contribution?

Typically, you can change your 401(k) contribution at any time, though some employers may allow less frequent changes. Be sure not to confuse your 401(k) contribution with your 401(k) investment allocation; your 401(k) contribution is how much you put into the plan every pay period, while your 401(k) investment allocation is how your funds are invested within the plan.

You’ll be able to find much of this information when you begin your 401(k) enrollment.

How Often Can You Change Your 401(k) Contribution?

While some plans allow unlimited changes to your 401(k) contribution, others may limit adjustments to once per quarter, once per pay period, or once per year. Consult your plan documents or speak with your financial advisor for details on your specific plan.

What Happens if Your 401(k) Contribution Limit Is Exceeded?

The IRS sets maximum contribution limits for 401(k)s, updated annually. Exceeding these limits may result in penalties, and you’ll need to take corrective action, like withdrawing the excess employee contributions. For 2023, the IRS outlines that the maximum contribution for individuals under 50 is $22,500, and $30,000 for those 50 and over.

How to Change Your 401(k) Contribution

1. Contact your human resources department or plan sponsor to inquire about the process for changing your 401(k) contribution amount.
2. Review the plan rules provided by your employer, which should outline any restrictions for plan participants adjusting their contributions.
3. Complete the necessary paperwork, either electronically or on paper, to adjust your retirement plan contribution level.
4. Keep records of your submitted forms and follow up with your employer or plan sponsor to confirm the implemented change.
5. You should see these changes reflected in one of your upcoming pay periods.

Benefits of Adjusting Your 401(k) Contribution

• Maximizing employer match: Increasing your contribution amount may help you take full advantage of your company’s employer-matching contributions. This is essentially receiving “free money” toward your retirement savings without paying income taxes on those funds in the present.
• Accelerating retirement savings: Boosting your 401(k) contribution can help you reach your retirement goals faster and can help you build a larger nest egg. If you’re over 50 and looking to retire sooner, you may choose to make catch-up contributions to bulk up your overall contribution amount.
• Adjusting to financial changes: Changes in your financial situation, such as a salary increase or debt reduction, may warrant adjusting your 401(k) contribution to reflect your new circumstances.
• Taking advantage of tax benefits: Increasing your pre-tax 401(k) contributions can lower your taxable income in the year you make contributions, reducing your overall tax bill and keeping you in a lower tax bracket.

Drawbacks of Adjusting Your 401(k) Contribution

• Reduced take-home pay: Increasing your 401(k) retirement account contribution may result in a lower net salary, which could impact your short-term budget and financial goals.
• Potential impact on financial goals outside of retirement: A higher 401(k) contribution could limit your ability to save for other financial objectives, such as purchasing a home, paying for education expenses, or investing in other vehicles like a taxable brokerage account.
• Limitations imposed by the employer and IRS: Your employer and the IRS may impose restrictions on how often and by how much you can adjust your 401(k) contribution, limiting your flexibility.
• Strain on short-term budgeting and expenses: If you’re already struggling to meet your monthly expenses, increasing your 401(k) contribution could exacerbate your financial stress. The closer you get to annual contribution limits, the less you’ll have to use in the meantime.

Factors to Consider Before Adjusting Your 401(k) Contribution

Adjusting your 401(k) deferrals will impact your current spending and retirement savings pool. So you should consider several factors carefully before changing your retirement account contribution.

Retirement Goals and Timeline

Before adjusting your 401(k) contribution, evaluate your retirement goals, timeline, and current progress. Ensure any changes align with your long-term objectives and help you stay on track for a comfortable retirement. Typically, you’ll want to contribute as much as possible to set yourself up for a financially secure future.

You’ll also want to make sure you project your retirement withdrawals with your claim for Social Security.

Risk Tolerance and Asset Allocation

Consider your personal risk tolerance and asset allocation when adjusting your 401(k) contributions. Changing your contribution amount may impact your investment strategy and overall retirement portfolio, so factoring in these elements is essential. Various investment options will suit different risk levels, so explore what is available to you.

Current Financial Situation and Budget

Carefully examine your current financial situation and budget to determine if you can comfortably manage an increase or decrease in 401(k) contributions without causing undue stress or hardship. Look at your monthly expenses, and also understand what you could lose in the long term if you don’t put aside as much as you planned.

Vesting Schedule and Employer Match

Understand your company’s vesting schedule and the implications of adjusting contributions on the employer match.

Ensure that any changes will still allow you to maximize your employer’s full match and avoid leaving employer contributions that serve as “free money” on the table.

Need Help Managing Your 401(k)?

It’s crucial to be well-informed and consider all factors before adjusting your 401(k) contributions. If you’re uncertain about making changes or need retirement planning assistance, consult with a financial advisor (ideally a Certified Financial Planner) or a retirement planning professional.

Remember, being proactive and knowledgeable about your retirement savings is critical to securing a comfortable future.

If you want to complete a rollover, consider working with Capitalize. Our team of experts will help manage the process of finding all of your old retirement savings accounts and transferring them into an IRA.

Take the first step toward optimizing your retirement planning by working with Capitalize today.