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Financial Planning for Executives: Navigating Your 401(k) When You Max it Out Mid-Year


Listen to the audio version here.

For many executives, saving for retirement is a given. You’re likely taking advantage of your company’s 401(k), and their matching program to continue to boost your retirement savings. But your company’s 401(k) plan only gets you so far. The current maximum for 401(k) contributions is $18,500 each year if you’re under age 50, and $24,500 a year if you’re 50 or older.  

When your income has climbed to a certain point and you’re saving based on a percentage of your income, then your contribution amounts will increase as your salary increases. However, there is a hidden risk with aggressively saving to your 401(k) - you run the risk of maxing out too early.  


Review Your Employer’s Match Program 

Many employer matching programs come with a unique caveat – they only match if you continue to contribute all year long. If this is true for your employer, it means a few things: 

  1. Your employer will stop matching contributions when you stop contributing to your 401(k) – which, if you max it out mid-year, means they’ll stop making matching contributions mid-year, too. 
  1. You’ll lose out on thousands of dollars in the months that you (and your employer) stop contributing to your 401(k). 

It’s important to note that this is only a problem if your employer deposits their matching contributions each pay cycle. Some companies choose to deposit their employer-match into your 401(k) once a year after they’ve tallied all your contributions for the previous year. If this is how your employer runs their 401(k)-matching program, then you’re all set. However, if your company falls into the “deposit every paycheck” camp, then you need to take special precaution to spread your contributions out evenly over the course of the year to maximize your employer match. If you don’t, it could cost you thousands of dollars each year. 

 

Where Else Can You Save? 

Once you’ve figured out the best way to leverage your employer match within your 401(k), you can start to focus on other ways to continue your retirement savings once you’ve maxed out your 401(k) contributions. It’s often easiest to break this strategy into two schools of thought – ways to save within your organization, and where to go outside of your employer to continue saving for retirement. 

Options Within Your Organization 

There are often other options within your company that help you continue to save for retirement after you’ve maxed out your 401(k) before year-end. First, you should look to see whether you’re eligible for a Health Savings Account (HSA) in conjunction with a High Deductible Health Plan (HDHP) through your employer-sponsored insurance. If you qualify for an HSA, the tax benefits can potentially be even more significant than the ones you receive through your 401(k). However, before you jump in to a HDHP insurance policy with a qualifying HSA, you should make sure that it’s the best health insurance option for you and your family.  

Another option would be a Deferred Compensation program. These vary from company to company so can be quite different. We’ll cover those is a separate post for Executives. 


Options Outside of Your Organization 

When you’ve maxed out your 401(k), you might find that retirement planning needs to go beyond options that your employer offers. There are two types of retirement savings accounts to look for here – taxable and tax-deferred. Your 401(k), for example, is tax-deferred, meaning you’ll be taxed as ordinary income when you start to withdraw funds during retirement. Taxable accounts are funded with taxed money, so your withdrawals aren’t subject to income tax. Distributions throughout the year will taxed at different levels, and upon the full or partial sale of these investments, the gains will be taxed at capital-gains tax rates. 

Roth IRAs are typically the most commonly thought of taxable retirement savings account. However, to qualify for a Roth IRA, you have to be under a certain income limit ($199,000 for individuals who are married and file a joint tax return as of 2018). Still, high income executives still have other options available to them – from a Backdoor Roth to a Single Premium Immediate Annuity (if you’re on the doorstep of retirement). You might also consider alternative investing options such as investing in your home, making extra mortgage payments, or investing in real estate beyond your own home. 

 

Don’t Stop Saving  

If you choose to continue your retirement savings journey beyond your 401(k), make sure you don’t stop saving altogether. Growing your retirement nest egg now, while you still have time for compound interest to work in your favor, is critical. Not only does contributing to other retirement savings vehicles help grow your savings for when your golden years roll around, it also can help you to reduce your current taxable income – which means you’re both saving for the future and keeping more of your hard-earned paychecks in the present. 

 

Financial Planning When You Have Too Much Money 

Having “too much” money can certainly throw a wrench in your financial plan. Maxing out a 401(k) too early in the year is one of many difficulties that high-earning executives face in their financial planning journey. It’s important to remember that, although your financial life may feel complex, you can still coordinate all aspects of your strategy to work toward your goals. Defining how you want to live during retirement, and what you need to do to get there, will be key aspects of your planning moving forward. A CFP® professional (like myself) can help you to build a comprehensive strategy that leaves no tool at your disposal unused – including your 401(k).