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Can I max out my 401(k) late in the year?

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Q.: I’ve had a better-than-expected year and am receiving a nice bonus. I would like to max out my 401(K). Can I do that with the bonus? Do I just write a check to the plan?


A.: Tim, congratulations on the bonus. You cannot write a check to your 401(k) but you may still be able to max out. The tax law states that participants in a 401(k) plan can contribute 100% of their earned income up to the employee deferral limit for the year. A bonus would be considered earned income.

The maximum employee deferral for 2022 is $20,500. If you are over age 50, you may also contribute an additional “catch-up” amount of up to $6,500 for a total of $27,000. I suspect your earned income is far more than these numbers so you should be eligible to max out your contribution.

Where this can get tricky is in the provisions of your particular plan. While the tax code says you can contribute up to $20,500 or $27,000, your salary or your plan may present a hurdle to maxing out your contribution this late in the year.

For instance, say you are over 50, have a salary of $120,000 ($10,000/mo.), and were contributing 10% to your plan throughout 2022. You will have made $11,000 of contributions through November with $1,000 more in queue. While you are eligible to contribute another $15,000 ($27,000 max less $12,000 contributed through payroll), you will only be paid $10,000 in December.

Further, some plans impose a limit on the percentage of each pay cycle that can be deferred. Say your salary is $30,000/month in the above example instead of $10,000. You have enough income to max out but if your plan limits the per pay period deferral percentage to 30%, only $9,000 can be deferred in December.

In addition, while many plans allow changes at will, many others do not. Smaller companies in particular often only allow changes to participants’ payroll deduction percentages at certain times, certain frequencies, or after the occurrence of specific events. Even at larger companies there is often a 1 to 2 pay period lag to implement contribution changes.

So, Tim, in order to max out in 2022, your bonus must be big enough and your plan must allow a large enough deferral on that bonus. Contact your HR department and refer to your plan’s Summary Plan Description to see what your plan allows.

For 2023, due to some substantial inflation adjustments the maximum employee deferral will be $22,500 and the catch-up contribution for those 50 and over rises to $7,500. Employee deferrals must be done through payroll, so planning is important. You may want to save more aggressively over the course of the year to avoid a year end crunch on next year’s bonus.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line. 

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.


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