I just got a raise. How can I max out my 401(k)?

Dear Dan,

I found out I will get a nice raise starting in November. Since I’m not used to getting that much pay, this seems like a good time to increase my savings. I can save more and won’t even feel it. I also have some cash saved at my bank. I’d love to max out my 401(k). With the raise not kicking in for a while, do I just write a check to the plan?

— Todd

Dear Todd,

Congrats on the raise, and I love your thinking here! Saving all or part of a raise is one of the easiest ways to boost savings because you haven’t been used to spending the new income.

“Employee deferrals,” that’s what you contribute from your pay, must be done through payroll. You can’t just cut a check. To max out your contributions to the 401(k), you must navigate some limits.

First, the dollar limit maximum for employee deferrals in 2023 is $22,500. If you are over age 50, you may also contribute an additional “catch-up” amount of up to $7,500 for a total of $30,000.

However, you’ve probably been asked by your employer what percentage of your pay you want to contribute not a dollar amount. Technically, the tax law states that participants in a 401(k) plan can contribute 100% of their earned income up to the employee deferral dollar limit for the year. Most plans do not allow such a high deferral percentage.

What is possible for you depends on the provisions of your particular plan. Many plans impose a limit on the percentage of each pay cycle that can be deferred. If your plan limits the per pay period deferral percentage to say 15%, that is all you will be allowed to contribute.

In addition, while many plans allow changes at will, many others do not. Smaller companies in particular often restrict changes to elective deferrals to certain frequencies or specific dates. At some companies, changes can take a pay period or two to go into effect.

Nonetheless, it may be possible to maximize your elective deferrals. The logistics are different, but the net effect will be the similar to writing a check. Here’s how.

You should be able to easily calculate how much you will contribute for the year if you keep doing what you are doing and make no changes. Subtract that amount from the maximum $22,500 (or $30,000 if over 50) and you have the goal for additional deferrals.

From there, divide the goal by the number of pay periods left and you will have a per pay period dollar goal. Convert that dollar amount to a percentage of your pay and increase your deferrals by that percentage.

So, let’s say you will be $6,000 short of maxing out at your current salary and rate of savings. Further you have six pay periods left. You can’t just cut a check for $6,000. To max out, you need to save $1,000 more per pay period. Convert $1,000 to a percentage of your pay and increase your savings rate by that percentage.

Your take-home pay will go down by $1,000 per pay period if you are making a Roth or after-tax contribution, but less than $1,000 if you contribute pretax. To make up the difference in your take-home pay, tap the bank account for the decline each pay period. By the end of the year, you will have maxed out and your bank account will be lower by $6,000 if making Roth or after-tax contributions or less than $6,000 if making pretax contributions. The end result will be very similar to what would have happened had you been permitted to write a check.

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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