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

Saving for retirement is a critical part of financial planning. And understanding when and how you can adjust your 401(k) contribution levels can help you make 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. It allows you to contribute a portion of your pre-tax salary to a tax-deferred retirement account.

There are many reasons you might want to change your 401(k) contributions, such as income fluctuations, family circumstances, or simply wanting to boost your retirement savings. In this post, we’ll explore when and how you can adjust your contribution rate—and what factors to consider before making changes.

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 the rules governing your retirement accounts. Here’s what you need to adjust your employee contributions.

When Can You Change Your 401(k) Contribution?

You can usually change your 401(k) contribution at any time, though some employers may limit how often you can make an adjustment. You should be able to find the information you need in your employee benefits package.

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.
• Your 401(k) investment allocation is how your funds are invested within the plan.

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

If your new employer does impose limits on how often you can change contributions, they may be once per pay period, once per quarter, or once per year. Again, your plan documents should give you the information you need—and you can always ask for the help of a financial advisors.

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

The IRS sets a maximum contribution limit for 401(k)s, which is updated annually. Just like making an early withdrawal, if you exceed the limit, you might pay a penalty—and be required to withdraw the excess. For 2024, the IRS outlines that the maximum contribution for individuals under 50 is $23,000, and $30,500 for those 50 and over.

How to Change Your 401(k) Contribution

Ready to change your employee contributions? Here’s how.

1. Contact your human resources department or plan sponsor to inquire about the process for changing your 401(k) contribution amount. Each plan will have its own specific process, but it can usually be done in just a few minutes online. You can also use this moment to review any plan rules imposed by your employer, including restrictions on how often you can adjust employee contributions.
2. Next, decide whether you’d like your new contribution to be higher or lower than your existing employee contributions. Don’t forget: Your employer may match your contributions up to a certain percentage, and if they do, it’s usually a good idea to contribute at least that amount. It’s basically a free pay raise.
3. Now, follow the steps provided by your plan sponsor to adjust your retirement plan contribution level. Usually this will involve logging into a web portal to make your adjustments, but you may be able to complete the process on paper if you’d rather.

It’s as simple as that. Just remember to Keep records of your submitted forms and follow up with your employer or plan sponsor to confirm the implemented change. You should see these changes reflected in an upcoming pay period.

Benefits of Adjusting Your 401(k) Contribution

Curious how a retirement fund modification could help you? Here are some of the benefits.

• Maximizing employer match: As mentioned above, increasing your contribution amount may help you take full advantage of your company’s employer-matching contributions. Did we mention that, along with being a free pay raise, you also don’t pay taxes toward those funds until you withdraw them in retirement?
• Accelerating retirement savings: Boosting your 401(k) contribution can help you reach your retirement goals faster. 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 be a great opportunity for a 401(k) modification.
• Taking advantage of tax benefits: Increasing your pre-tax contributions can lower your taxable income in the year you make them, potentially reducing your overall tax bill and keeping you in a lower tax bracket.

Drawbacks of Adjusting Your 401(k) Contribution

On the other side of the coin, there can be drawbacks to adjusting your 401(k) contributions, too.

• Reduced take-home pay: Increasing your 401(k) retirement account contribution often means a lower paycheck, which may make it harder to make ends meet, especially as you approach the annual contribution limits.
• Potential impact on financial goals outside of retirement: A higher 401(k) contribution could also limit your ability to save for other financial objectives, like buying a house, putting kids through school, or taking advantage of other investment opportunities.
• 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 contributions to your employer-sponsored plan, limiting your flexibility.

Factors to Consider Before Adjusting Your 401(k) Contribution

Adjusting your 401(k) deferrals will impact both your current budget and eventual retirement savings pool, so it’s worth thinking carefully through the following considerations first.

Retirement Goals and Timeline

Evaluate your retirement goals, timeline, and current progress to ensure that any changes align with your long-term objectives and kepe you on track. Some platforms offer retirement planning tools that can help you easily understand potential impacts of contribution adjustments.

Risk Tolerance and Asset Allocation

Consider your personal risk tolerance and asset allocation. Changing your 401(k) contribution amount could potentially shift the balance of your portfolio overall—and besides, an adjustment is a great opportunity to review your investment options and rebalance if necessary.

Current Financial Situation and Budget

Carefully examine your current financial situation and budget to determine if you can comfortably manage an increase without causing undue stress. Look at your monthly expenses, but also consider what you could lose in the long term if you don’t put aside as much as you planned.

Vesting Schedule and Employer Match

If your company offers an employer match, chances are they do so on a vesting schedule. That means you’ll need to work there for a certain amount of time to keep the match if you quit. So if you’re thinking of making changes to your 401(k), try to ensure yo’ll maximize whatever match is available to avoid leaving “free money” on the table.

Need Help Moving Your 401(k)?

It’s crucial to be well-informed and consider all factors before adjusting your 401(k) contributions. If you need help with your investment strategy, consider hiring a financial advisor (ideally a Certified Financial Planner) or a retirement planning professional.

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

If you want to enjoy the benefits a 401(k) 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 so you can focus on what’s important to you today.