With only a few payroll periods left in the year, it’s time to check in on just how much you’ve contributed to your employer-sponsored retirement plan.
While 2020 IRA and Roth contributions are permitted through April of 2021, your contributions to a 401(k), 403(b) or 457(b) must be made from salary deferral before the end of the calendar year.
Think you’ve already contributed the maximum amount allowed? Great! But just to be sure, look at these common mistakes to make sure you’ve considered everything:
The employee contribution limit increased from $19,000 in 2019 to $19,500 in 2020. Don’t miss out on that extra $500! And, if you are 50 or older, you can also make a catch-up contribution of $6,500 for 2020 (it was only $6,000 in 2019).
It’s not uncommon to be on “probation” for a few months before you can participate in your new employer’s plans. If you were out of the game for a little while due to a job change, update your per pay period contribution to make sure you are on track for the total annual amount you were targeting.
The most common one we see is when employers make a service provider change. Similar to when you change jobs, a service provide change could result in your being out of the game for a pay period or two. It’s best to double-check!
You are now eligible to contribute 33% more. Catch-up contribution limits are generous at $6,500 this year. This is not a time to lie about your age!
Even if you told your employer you want to contribute the maximum amount, now is the time to double check. Review your last pay stub for what you’ve already contributed and your per pay period contribution amount. Then do the math between now and the end of the year and make sure you are on track to max out.
Your contributions will lower your overall taxable income and increase your potential for tax-deferred growth (growth you don’t have to pay tax on until much later in life!).
That said, everyone’s situation is different, and there may be reasons NOT to max out your contribution.
Need some advice for your specific situation? Let’s Talk.
Ed is Director of Financial Planning of Heritage Financial Services, where he creates and shapes best practices in financial planning for the firm. In this role, he mentors the wealth advisors and consults on unusual or highly complicated client cases.