The end of the year is right around the corner, which means it’s time to start thinking about the deadlines for maxing out retirement investments and reducing your annual income tax burden. For those using a 401(k) account to set aside money for retirement, the cutoff for contributions is a matter of weeks away.
The 401(k) contribution deadline
While Individual Retirement Accounts (IRAs) allow adding cash up until the annual tax filing deadline in April, 401(k) contributions do not fall under that same guideline. Contributions must be made by the close of the calendar year—meaning by December 31. The same deadline applies to Roth 401(k) plans and even to the 403(b) plans offered by non-profit organizations and government employees.
“The reasoning for the year-end deadline is that these retirement plan contributions are made via payroll deductions,” says Julie Virta, a certified financial planner and senior financial advisor with Vanguard Personal Advisor Services.
In other words, because contributions are made through payroll, account holders cannot simply take any money they may have available and add it to a 401(k) fund.
2022 and 2023 contribution limits
The IRS establishes limits for elective contributions to retirement funds, including 401(k) accounts. For 2022, the contribution limit is $20,500.
Those who are 50 or older at the end of the calendar year can make what’s known as catch-up contributions as well, which allows for an additional $6,500 in funding annually. That means, for those who are 50 or older, the combined contribution limit would be $27,000.
For 2023, the contribution limits inch upward to $22,500 and $7,500 for catch-up contributions.
If your 401(k) contributions are lagging behind, you’re not alone. According to research from Fidelity investments, a mere 9.7% of 401(k) participants hit the maximum limit in 2021.
“Maxing out 401(k) retirement contributions is something few retirement savers are able to actually achieve,” says Deba Prasanna Sahoo, senior vice president and product area leader for Fidelity Investments.
Tips to max out your 401(k) contributions
There are many reasons why it’s a good idea to max out the contributions to your retirement plan each year. To begin with, doing so can go a long way toward ensuring that you have an adequate retirement fund. The contributions also come with a variety of tax benefits.
“From a tax perspective, a traditional 401(k) is funded with pre-taxed dollars, so earnings grow tax-deferred until you take the dollars out,” says Virta. “And making greater contributions to a traditional 401(k) can reduce your tax liability for that year given the deduction.”
So what should you do if you want to max out your 401(k) contributions? The first step is to crunch the numbers and find out exactly how much you’ve contributed to date and how much more you’re eligible to contribute. Once you’ve identified that number, you’ll likely need to take steps quickly to increase your payroll contributions.
“Generally, it takes one to two pay cycles for contributions changes to be effective, so you will need to plan appropriately,” says Prasanna Sahoo, who adds that for many people, 401(k) payroll deduction changes need to be made as early as October or November in order to reach the maximum contribution limit.
It’s also important to understand that your paycheck in a given payroll cycle may not have much wiggle room to contribute a lot more to your 401(k) based on your personal expenses and the size of your paycheck. “This may also limit your ability to max out if you wait too close to the year’s end,” Prasanna Sahoo adds.
If you receive an annual bonus from your employer, this may present another opportunity to maximize your annual 40(k) contributions.
“Having a strategy is important. If savers are looking to maximize contributions for the year, they can consider supplementing with extra cash flow, like an end-of-year bonus,” says Virta. “Investors who anticipate extra cash flow at the beginning of a calendar year, like a pay increase, can consider adding more dollars earlier in the year for added growth which can be advantageous over time.”
Employers are making it increasingly easier to make these types of contribution changes—often allowing it to be done through the retirement plan’s website. In many cases, you can increase or lower your 401(k) contributions at any time during the year. But some plans may limit the number of times you can make such changes, says Virta.
The deadline for maximizing your 401(k) contributions is just a few weeks away. There’s no time to waste in calculating how much you’ve contributed thus far and increasing your payroll deductions for your 401(k) program if you want to get closer to the annual contribution limits.
And looking to the future, the best time to make decisions about 401(k) contributions is at the start of the year, which can make it easier to ultimately reach the maximum contribution limit benchmark.