Most of the employees prefer to have a retirement plan for themselves. It allows them to lead a comfortable lifestyle and a secure future. The most useful thing about the 401(k) plan is that at the time of withdrawal, there are no taxes for the employee to pay.
So when the employees get a chance where the employer matches the retirement plan contribution, and no tax is required, it’s an incredible offer.
But sometimes, when the employees came across new responsibilities, changing the contribution amount for the 401(k) retirement plan became necessary. Besides that, there are many other reasons why the contribution plan needed some changes.
Still, as the employees don’t know how to change their 401(k) contribution, and it works, this article about changes in 401(k) Contribution is here.
Understanding the 401(k) Contribution
Brief explanation of what a 401(k) plan is
The 401(k) is a retirement plan for employees working under a company. Many people are new to this job sector and don’t know much about retirement plans.
The method of the 401(k) plan is pretty simple. After enrolling for the 401(k) retirement savings plan, a particular amount will automatically be deducted from the employee’s paycheck and added to the 401(k) plan. The employer or company will match the monthly deducted amount of the paycheck or a part of it, and it will also be added to the employee’s 401(k) plan.
Importance of regular contributions for retirement savings
When a person in their early to mid-20s starts to work for a company, they don’t think they have to plan for retirement. However, they don’t understand that saving a portion of money each month for the future will make their future after retirement more secure and comfortable.
By having the 401(k) plan, an employee can save and collect much more money than just saving it in the bank. Many reputed and great companies are available that match the amount of the 401(k) plan that the employees are contributing. But if the employer can’t match the retirement plan amount the employee is contributing, in that case, they will contribute a fixed percentage of it.
Therefore, with the 401(k) plan, employees can save more than usual with the help of the employee. This way, by the time a person takes retirement, they will have enough money to spend on their expenses.
Can You Change Your 401(k) Contribution Anytime?
Overview of the rules and regulations governing 401(k) contributions
Many rules and regulations and contribution plans are available for the 401(k) plan. The plan is simple for the employee as they have to contribute a percentage of their monthly salary, and it will automatically be added to the retirement account. But there is more to it.
- If any employee is under 21 years old, then he or she is not eligible for this retirement plan.
- Based on the company’s rules, an employee must work at the company for at least a year to be eligible for the retirement plan.
- But for part-time employees, there is an option available where the employees can have a 401(k) plan for one year or work.
- Employees can contribute up to 10% to 20% of their monthly salary. However, 4% to 10% is the most common option.
- Then, the 401(k) clan will work if the employee is 59 1⁄2 years old, and an employee with an IRA can withdraw the amount from 72 to 75 years of age.
Explanation of the potential flexibility in modifying contributions
Most companies allow the change in the contribution amount of the 401(k) retirement plan. Employees can have many issues because, by discussing with HR, changing the contribution amount won’t be a big problem.
Besides the amount of contribution, there are many other things like changing the contribution frequency, adding intervals for the 401k contribution schedule, shifting the 401k portfolio, etc.
Now, all those modifications in contribution and 401k plans depend on the flexibility and services provided by the employer or the company. The only way to know about the services is by knowing the company policies and discussing the facts with HR.
Employer’s rules and restrictions
The employers or the company can decide what ‘match up’ amount or percentage they will contribute to the employee’s 401(k) plan. The employer can follow the employees’ traditions, safe harbor, SIMPLE, automatic enrollment, etc., and the 401(k) plan based on the company’s policy.
However, it is clear that based on the $22,500 contribution in 2023 and $23,000 contribution in 2024 the employee, the employer can only provide a catch-up contribution of $7,5000 for the 401(k) plan.
Therefore, the highest total contribution for the 401(k) plan is $66,000 in 2023 and $68,000 in 2024 for employees under 50. Those who are 50 or above can contribute $75,000 in 2024 and $73,500 in 2023.
Above these amounts, neither the employee nor the employers can go. And if any employee is interested in providing more money for a 401(k) plan than a retirement plan, they have to invest in other segments.
Plan documents and policies
Changing your 401(k) contribution is possible for that; as an employee, you have to discuss the facts with HR and settle the ‘match up’ amount provided by the company.
Then, you have to fill up a form provided by the company management where you have to mention the amount you are willing to pay for the monthly 401(k) retirement plan payment and any other changes you discussed with HR.
The 401k can go higher or lower, but the employee has to agree that it will affect the employer’s monthly contribution as well. Also, the employee has to make changes under the company’s policies.
So, if a company doesn’t provide a contribution interval, the employee can’t take advantage of the service.
The frequency of allowed changes and typical restrictions
Most companies commonly provide chances to change the retirement plan contribution every 4 to 6 months. This way, the employee can choose their comfortable retirement plan contribution amount. Many big companies also allow their employees to change the 401(k) plan contribution amount once a pay period.
It’s helpful for the employees as they can change the contribution amount in any urgent situation. Whereas some other companies also have a once-per-year 401(k) contribution limit.
Therefore, it depends on the company and its policies that will give the employees a proper idea of how many times they are allowed to change the 401(k) contribution amount. This way, if the company has a once-a-year contribution change available, the employee has to choose a reasonable percentage of their salary for the retirement plan contribution.
IV. Exploring Your Options for Changing 401(k) Contributions
Modifying contribution amount
Increasing or decreasing contributions
The employee has the right to increase and decrease the contribution amount for the 401(k) plan. Based on the employer’s contribution, the ultimate retirement amount will also increase or decrease.
Dollar amount or percentage-based changes
Based on company policy, the employee can change the 401(k) contribution amount to dollar- or percentage-based. But in most companies, the 401(k) contribution works in percentages. So, depending on the contribution percentage of the employees, the employer will partially or fully match the retirement plan contribution.
Maximum contribution limits and any constraints
Employees can contribute 20% of their salary to the 401(k) retirement plan. But no other amount above 20% is allowed, as if anyone wants to try that, they have to pay for extra service, because of which ultimately the employees will experience some losses for the savings. In terms of amount, we can say an employee in 2023 can save $22,500 annually and $23,000 in 2024 if the person is under 50 years for the 401(k) plan.
If the person is 50 or older, they can contribute around $30,000 for 2023 and $30,500 for 2024 for the retirement plan. So, just by paying 20% of the salary for the retirement plan, if the employee reaches the $22,500 amount limit, they can’t contribute extra money for the 401(k) plan.
Changing contribution frequency
Switching from monthly to bi-weekly or vice versa
Switching from monthly to bi-weekly payment contributions for the 401(k) plan can be complicated. Not all companies provide salaries bi-weekly; therefore, if any company does provide a bi-weekly salary, then with employees’ consent, it will deduct the 401(k) contribution amount. For part-time employees, this service can be available as well. However, the monthly contribution is simpler for both the employee and employer.
Options to adjust contribution intervals
Employees can pay for the 401(k) plan while enjoying their preferred interval period. So, any employee can pay for two months and take a one-month break for the 401(k) plan. Not only that, for many companies, the tax deduction for the retirement plan applies only to the calendar year, in which case the employee can complete the contribution until the end of the year.
So, to know more about these contribution intervals and whether they are available, the employee must discuss the matter with HR.
Reallocating existing contributions
Shifting investments within the 401(k) portfolio
Sometimes, employees do leave a company, and at such times, employees get confused about the money they spend on the 401k plan. If any employee leaves a company, they can withdraw the saved amount and the amount the employee has because of the vesting period. But it isn’t that beneficial that the employee will have to pay for taxes as they are trying to withdraw the amount before 59 1⁄2 years of age.
Instead, the employees should roll over the 401k plan into an individual retirement account (IRA). Based on the company’s policy, they can start another 401k plan in the new company.
Considering risk tolerance and investment goals
As an employee, if you aim to provide $20,000 from your annual salary in that case, if you reduce the 401(k) contribution amount, the savings will reduce, which firstly affects the investment goal. Then, if the employer contribution decreases, it will impact the investment strategy; not only that, the retirement portfolio cannot be that good for the future.
So, at the time of relocating, the employee has to look for a better 401(k) plan service, or they can join the same company from another location.
V. Factors to Consider Before Making Changes
Assessing the personal financial situation
Budgeting and cash flow considerations
By reducing the 401(k) contribution amount, the employee will have difficulty with the retirement plan, but for the present situation, things will get better. However, when increasing their contributions, employees must ensure that the salary after 401(k) is sufficient for them and won’t cause them any financial hardship.
Employees have to save money for health insurance, vehicle insurance, and many other things, so the employees should keep the cash flow in mind.
Impact on retirement savings goals
This year, the 401(k) contribution limit increases, so those who can maintain a high percentage of 401(k) contributions can contribute following the company’s policy. This way, when the person receives the money at the age of 72, the amount will be enough for them.
However, reducing the 401(k) contribution amount will negatively impact the retirement portfolio, and savings can be so low that the person may have to rely on social security.
Taking advantage of employer-matching contributions
Very few companies are available that match the 401(k) contribution amount with the employees. If the employer is providing you equal to your contribution, for example, if you are contributing 4% of your salary and the employee is also contributing 4% for the 401(k) plan, it is very generous.
Otherwise, most employers provide partial matching where if the employee is contributing 6% salary for the 401(k) retirement plan, then in return, the employer will provide 4% of the contribution match. Therefore, understanding the employer’s matching contribution and advantages is very important.
Seeking professional guidance if unsure about changes
Professional guidance is required for both those who can maintain a high percentage of 401(k) contributions and those who want to maintain as low a contribution as possible.
For those who can maintain a high percentage contribution for the retirement plan instead of putting so much money into one place, the professional can guide them about which other places the employees should invest.
Those who have huge amounts of daily expenses to maintain can use the guidance of a professional to know what the perfect percentage of their salary is that they can contribute to the 401(k) plan and, after that, have enough money for future and present expenses.
The 401(k) retirement plan has many benefits; everyone should have them, but sometimes a few changes are necessary. So it’s not that difficult to change the amount of contribution.
However, the effect on it in the future can be vital. So it Isn’t the question of whether you can change your 401(k) contribution anytime or not; it’s about what the adjustment of the 401(k) plan can do.
A person’s circumstances can be different, so based on that, the employees can adjust the contribution amount, but it’s important to review them before that. For every employee, having a proper retirement plan is a must, so instead of avoiding it, regular evaluations and updates of the retirement saving strategy should always be an employee part of life.