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Ever wondered if you can adjust your 401(k) contributions whenever you want? You're not alone.
Perhaps the raise you just negotiated is making you consider increasing your retirement savings. Or, if you’re one of the 8% of workers contributing only the automatic default amount, you just realized you could be benefiting more from your employer’s matching contributions.
The good news? You can likely change your 401(k) contributions at any time. Let's explore some helpful tips that will help you strategically manage the amount you put toward your 401(k) throughout the year.
When can I change my 401(k) contribution?
Generally, you can modify your contribution amount at any time, but it ultimately depends on your company’s retirement plan rules. The Department of Labor requires employers to allow quarterly modifications to employer-sponsored retirement plans, but some choose to offer even more opportunities for adjustments.
How often can I change my contribution?
While there's no universal rule, some plans may restrict how frequently you can change your contribution amount, while others may require a waiting period between adjustments.
How to change your contribution amount
To adjust the percentage of your paycheck that goes into your 401(k), you’ll need to look into your company’s retirement plan, talk to the right people, and fill out the necessary paperwork.
Let’s look at these simple steps to changing your 401(k) contribution.
Know Your Plan Rules
Familiarize yourself with your company's 401(k) plan rules, focusing specifically on the eligibility criteria and any limitations on the frequency of contribution changes. Look for the summary plan description, or SPD, in your 401(k) provider’s online portal or get a copy from your plan administrator.
Contact HR or your plan administrator
Reach out to your Human Resources department or the plan administrator to ask for details about the process for changing contributions. Confirm if you have to make changes during specific enrollment periods and whether they can be made online or through paperwork.
Complete the Paperwork
The online process will likely only take a few minutes – you’ll update your new contribution amount and provide any other required information. If you prefer a more traditional method, ask your plan administrator for physical copies of the paperwork.
Most common reasons for changing contributions
The average American with a 401(k) defers 7.4% of their salary to their account. There are a wide variety of practical reasons why a person may opt to increase or decrease their 401(k) contributions.
Common reasons include:
- Income changes: A raise, bonus, or salary reduction may lead individuals to revisit their 401(k) contribution levels to optimize savings in line with their current earnings. Consider this scenario: Your current annual income is $120,000, and your annual 401(k) contribution is 8%, which equals $9,600. Now, imagine a salary increase brings your new annual income to $140,000. With the flexibility to adjust, you can increase your contribution to 10%, resulting in $14,000 going towards your 401(k).
- Life events: Marriage, divorce, or the birth/adoption of a child can prompt many people to reassess and adjust their 401(k) contributions to better match up with their new financial responsibilities.
- Financial goals: Shifts in long-term financial goals, such as buying a home, funding an education, or planning for retirement, often prompt folks to modify their contributions.
- Market conditions: Economic changes can influence people's risk tolerance and overall investment strategy. During periods of market volatility or stability, some people may adjust their contributions to realign with their current risk preferences.
- Retirement planning milestones: Many people fine-tune their 401(k) contributions as they near retirement to ensure the total value of their savings can cover the lifestyle they’d like to live.
Pros and cons of adjusting your contribution
Modifying your 401(k) contribution could have “hidden” benefits and risks you hadn’t realized. Let’s make sure the energy you’ve put into managing your 401(k) is worth it by considering these potential consequences in advance.
Pros
The benefits of being able to tweak your 401(k) contribution include:
- Flexibility with life changes: You can easily adapt to your life’s landmark moments, such as getting married, having a child, or changing jobs. This flexibility helps to ensure your retirement savings evolve with your financial situation and goals.
- Optimizing for financial goals: Whether you're aiming to buy a home, fund education, or retire early, adjusting your 401(k) contribution allows you to tailor your savings approach to meet specific milestones.
- Maximizing employer matches: Employer matching provides free money that can boost your retirement savings. Maximizing your contributions ensures you're making the most of your 401(k). The added bonus is that all of your traditional 401(k) contributions are tax-deferred, so they’ll grow tax-free.
Cons
There are also potential risks to meddling with your contribution to your retirement savings, including:
- Potential tax implications: Depending on the type of 401(k) plan (traditional or a Roth 401(k)), adjusting your contributions may have tax implications. Reducing your contribution will increase your take-home pay, meaning more of your income becomes taxable. Take time to research and understand any potential tax consequences before you finalize the change. Consider consulting with a financial advisor to ensure you make informed decisions.
- Market timing risks: Trying to time the market by frequently making changes to your contributions, therefore increasing or decreasing the amount you invest, can be risky. It's difficult to predict market movements (even for the experts), and frequent changes may lead to missed opportunities or unintended losses.
- Administrative hassle: Some plans may involve paperwork or administrative processes when adjusting contributions. This could be a hassle, especially for anyone who prefers a set-it-and-forget-it approach to retirement saving.
The Playbook take
The power to control your 401(k) contributions anytime is at your fingertips. Your company’s retirement plan will explain how often you can change them, and now you know the many reasons to do it.
Monitoring your 401(k) contributions will help you adjust them strategically to improve your long-term growth. The higher your contributions, the less taxable income you have, so more money goes to your retirement instead of Uncle Sam. And adding a financial planning tool to your toolbox can help you maximize your tax advantages and help that money grow.
