Personal Finance

Only contributed $5k to my 401(k) this year — can I put 75% of my paycheck toward it now?

Rich Duprey

Published: December 21, 2024 9:10 am

The 401(k) program has been a tremendous help to workers planning for their retirement. Over 71 million workers have access to a 401(k), or 56.6% of all workers, who have put $8 trillion into the plan.

According to Fidelity Investments, there are 544,000 people with at least $1 million in their 401(k) account in the plans they administer. That is a better than 9% increase from the year-ago figure people put away more of their money. Employees contributed 9.4% of the money to their accounts while employers matched that saving with another 4.7%.

Many times, though, people get off to a slow start with their 401(k)s, which is a missed opportunity when it comes to employer-match programs. That is when for every dollar a worker contributes to the plan, the employer will match it one-for-one, or a percentage of it. This is free money you’re getting from your job and you should take full advantage of it.

Recently a Redditor on the r/personalfinance subreddit found himself in this situation. He had only contributed $5,000 to his plan through the first 10 months of the year and wanted to know if he could supercharge his contributions in November and December by contributing 75% of his salary.

Fortunately, he is able to as his employer allows it, but others might not be so lucky.

24/7 Wall St. Key Points:

• Employees can supercharge contributions to their 401(k) towards the end of the year if they fall short of maxing out.
• There are potential pitfalls in doing this, however, and maxing out a 401(k) might not be the best option.
• Also: Is your 401(k) optimized for your retirement plans? (Sponsored)

Proceed with caution

For 2024, employees can contribute up to $23,000 in their 401(k). Next year it rises to $23,500. The maximum contribution, including employer matches, is $69,000. So the Redditor could contribute another $18,000 over the final two months of the year to max out his contribution.

Now I’m not a planner, so these are just my opinions based on what I understand of the regulations, but other workers could face different rules the employer sets for contributions. 

For instance, they might limit the amount of a worker’s salary that can be contributed in any one pay period. Other jobs might have a lower threshold than 75%. Essentially, so long as the employer doesn’t let contributions exceed the $23,000 maximum they have leeway in setting restrictions.

Another issue arises with employer match programs. If an employee hits the maximum contributions allowed early, say in August, he can miss out on the employer match for the last four months of the year. 

That’s because employer matches are usually based on a percentage of your income for a pay period, not your annual salary. By maxing out early, the employer won’t be contributing after you reach the limit (some companies do have an end-of-year “true-up” that would provide the match anyway).

Your specific company plan will tell you whether that is included, but it is probably best to time your contributions to end with the last paycheck of the year.

The best route to the same goal

Still, maxing out a 401(k) might not be the best option. Because 401(k) contributions are pre-tax, your contributions and the earnings they generate will be taxed when you withdraw the funds. Many financial advisors advisors recommend contributing up to the maximum allowed for the employer match and then contributing to a Roth IRA or Health Savings Account (HSA).

Roth IRAs are after-tax contributions (up to a maximum of $7,500) so withdrawals at retirement are tax-free. HSAs may be even better because they are triple tax-advantaged. Contributions are pre-tax, so they lower your taxable income, earnings grow tax-free, and withdrawals for eligible medical expenses are also tax-free. As medical expenses are likely to be one of your biggest expenses in retirement, do the HSA first, then a Roth IRA, before maxing out your 401(k).

Key takeaways

If you haven’t maxed out your contributions to a 401(k) as you approach the end of the year, you may be able to defer a large percentage of your income to make up the difference. But you need to check with your employer to see if they will allow it and ensure you won’t need the money for living expenses.

Yet there may be better options for where you make contributions to retirement plans, and speaking with a financial planner should be a first step to craft a personalized plan.