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When in the Year Should You Max Out Your 401(K)?

Aim to contribute as much as you can to your tax-advantaged 401(k) retirement saving plans to maximize your savings.

The amount of contributions you are allowed to make each year is capped by the IRS, but this does not always mean that you should or even can contribute the maximum amount.

To choose the appropriate contribution amount, you will need to consider several aspects of your financial situation.

The most you can put into a 401(k) plan for 2022 is $20,500, or $27,000 if you’re 50 or older thanks to the $6,500 catch-up contribution.

To decide whether to contribute the maximum allowed, you’ll need to weigh several aspects of your financial situation.

Understanding 401(k) Plans

Due to its tax benefits, the 401(k) plan is a well-liked method of saving for retirement. Your tax liability is decreased when you contribute to a traditional 401(k) because the funds are pre-tax.

When you contribute to a Roth 401(k), your income must first be taxed. However, once you reach retirement age, you can withdraw all of your earnings tax-free.

Not all workers make the maximum annual contribution. Depending on your spending plan and financial priorities, you can decide how much to give.

In 2020, there will be about 600,000 workplace-sponsored 401(k) plans, with about 60 million active participants, millions of former employees, and millions of retirees. As of June 2021, the plan’s assets were valued at around $7.3 trillion.

Your ability to contribute is subject to annual contribution caps set by the IRS. The most you can put into a 401(k) plan for 2022 is $20,500, or $27,000 if you’re 50 or older thanks to the $6,500 “catch up” contribution.

What Is the 401(k) Maximum?

Your ability to contribute is subject to annual contribution caps set by the IRS. The most you can put into a 401(k) plan for 2022 is $20,500, or $27,000 if you’re 50 or older thanks to the $6,500 catch-up contribution.

You can more quickly take advantage of compound interest benefits and get more tax breaks if you can reach these maximums.

Having regular contributions deducted from your paychecks in amounts greater than you would need to reach the maximum in 12 months is one way to contribute to your 401(k) at the beginning of the year and max it out.

You would want to contribute more than $394.23 per pay period, for instance, if you were under 50 and received a weekly salary, to reach your 401(k) maximum early.

The maximum amount you could contribute to your 401(k) before the first half of the year is $20,500 if you made a contribution of $789 per week.

How many people do 401(k)s to the maximum?

It can be challenging for most employees to reach their 401(k) maximum early in the year.

A study done by Vanguard found that in 2021, only 14 per cent of 401(k) participants made the maximum $19,500 contribution.


The Vanguard study found that individuals who made the maximum yearly contributions tended to “have higher incomes, were older, had longer tenures with their current employer, and had accumulated substantially higher account balances.”

If you should save more money than you can afford, it depends on your income level, necessary costs, and financial priorities.

For instance, if you want to avoid losing your home to foreclosure, it’s crucial to pay off your mortgage before aggressively saving for retirement.

Before early 401(k) maximization, take debt into account. Think about the impact your debt is having on your finances when deciding whether to max out your 401(k) early in the year.

Your long-term expenses can significantly increase as a result of interest in your debt. Credit score deterioration brought on by debt from credit cards, auto loans, student loans, and personal loans may also limit your ability to obtain other loans.

Experian estimates that the total average balance of consumer debt in the United States, which includes mortgages, was $15.31 trillion in the third quarter of 2021, up from $92.727 in the same period a year earlier.

It’s frequently wiser to pay down high-interest credit card debt before making significant retirement savings.

Though it might also make sense to max out your 401(k) before you pay off your mortgage.

You can choose where to invest your extra money by comparing your expected rate of return on a 401(k) portfolio with the interest you will pay on your debt.

Emergency Planning

If you have a sufficient emergency fund, that is another financial aspect to think about before deciding too early to maximize your 401(k).

When you encounter unforeseen costs, such as a costly car repair or medical bill, an emergency fund can help you maintain your financial stability.

Creating an emergency fund of three to six months’ worth of expenses is something that many financial advisors advise doing, but the ideal amount for you will depend on your lifestyle and debts.

According to a Federal Reserve Board survey conducted in 2021, more than two-thirds of American adults (68 per cent) said they could pay a $400 emergency expense in cash or another form. 11 per cent further claimed they would be unable to find a way to pay the bill.

When you make a 401(k) contribution, you typically cannot withdraw funds without incurring penalties until you are 5912.8.

As a result, many people may place a higher priority on creating an accessible emergency fund than on early 401(k) maximization.

Ways to Receive the Full 401(k) Match

To maximize their benefits, many 401(k) account holders try to contribute at least as much as the employer match. Employers typically match up to their own limit, not the IRS maximum. They might match up to 3% of your salary, for instance.

Consider trying to make at least the annual matching contribution limit if you are unable to contribute the maximum IRS allowed in a given year.

401(k) accounts can have multiple holders. There is no limit to the number of 401(k) accounts you can have, but only active 401(k) accounts are eligible for payroll deductions as a form of contribution.

There are many 401(k) accounts that people have from prior employers, but inactive accounts are not eligible for contributions.

You are permitted to fund both accounts if you work two jobs, each of which offers a 401(k).

Your total contributions are subject to the IRS’s maximum contribution cap, which is $20,500 for individuals under 50 in 2022.

What Happens if You Make Too Many Contributions to Your 401(k)?

The IRS will need to receive a 1099-R form if you make contributions that are higher than the annual maximum allowed.

If you are under 5912, the excess funds will be taken out of the account and you will be subject to a 10 per cent penalty because you are effectively withdrawing the money early.

 If the money is not received back by April 15th, you might have to pay taxes on the extra money once more.

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How Much Can an Employer Put Into a 401(k) Account of an Employee?

Total contributions from the employer and the employee for 2022 cannot be more than $61,000, or 100% of the employee’s total compensation.
The Bottom Line

Your financial situation and unique circumstances will determine whether you should contribute the maximum to your 401(k).

There is no one-size-fits-all answer because your income, expenses, and financial priorities all have an impact on whether you can and should make the full contribution before the year is over.

Try to make a minimum contribution necessary to be eligible for your employer match, if your plan offers one or if you are unable to afford to contribute up to the IRS maximum. The equivalent of free money is matching contributions.

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