Can I contribute a large lump sum to my 401(k) outside of a
payroll deduction to minimize my tax bite and get closer to
contributing the maximum for the year?
Is a Payroll Tax Hike Coming?
Pre-tax contributions to your 401(k) must be made through
payroll deduction, so you can't add outside money to boost your tax
break. But there are a few ways you can increase your contributions
near the end of the year to get closer to the $17,000 maximum for
2012 ($22,500 if you're 50 or older this year).
Some employers let you contribute year-end bonuses to your
401(k) if you designate the money before the check is paid. And
most employers allow plan participants to change the amount
earmarked for their 401(k) at any time. A change to your
contribution level usually takes one to two paycheck periods to
take effect, says Patti Bjork, director of retirement research for
Aon Hewitt, one of the largest 401(k) administrators. Some
employers let you contribute a fixed-dollar amount from each
paycheck. Others require you to specify a percentage of your pay --
plans administered by Charles Schwab typically limit contributions
to 50% to 80% of your salary, for example. And some employers set a
lower percentage for highly paid employees.
If you do increase your contributions for your last few
paychecks, make sure your plan cuts off contributions when you
reach the $17,000 or $22,500 limit. Also notify your employer if
you contributed to another employer's plan earlier in the year, so
those numbers will be counted toward your maximum.
And reassess your contribution level during open enrollment for
2013. You may want to lower the level starting in January and
spread out your contributions over the entire year, especially if
your employer's match is based on each time you contribute (such as
dollar-for-dollar up to 6% of pay) rather than your total
contributions for the year.