Your Traditional 401(k) Year-End Review Checklist

November 7, 2023

A 401(k) plan is one of the most popular and effective techniques for saving for your retirement. A company will automatically withdraw and contribute money from each paycheck to your 401(k) plan. Some employers will even match a percentage of the contribution. Are you maximizing these contributions? There are also limits on how much you are allowed to contribute annually. Here is a 401(k) end-of-the-year checklist you may find beneficial in keeping up with your retirement strategy.

Review your goals

There is a good chance that you have created short- and long-term goals. You may have met with a financial professional who helped you create a strategy based on the lifestyle you hope to have in retirement. To reach your long-term goals, you will often pursue short-term goals. As life changes, so might these goals, and reviewing your goals at the end of the year can be beneficial.

Consider increasing your contribution amount

For 2023, the maximum contribution for employees is $22,500, or $30,000 if you are 50 or older. Catch-up contributions for those 50 or older are $7,500.

It is possible to make non-tax-deductible contributions to traditional 401(k)s above the employee contribution limit. The total 401(k) plan contributions an employer and employee can make cannot be more than $66,000 for 2023. For those 50 or older, the maximum is $73,500.

Get a 401(k) match from your employer if it is offered

Review your plan to determine if your employer offers a 401(k)-matching contribution. Typically, employers match employee contributions up to a percentage of annual income. Your employer can elect to match a percentage of contributions up to the limit or 100% of your contribution up to a percentage of your total compensation.

If you are a highly compensated employee, your employer may only match up to a specified dollar amount regardless of your income. As an example of how matching works, say your employer offers to match 100% of all your contributions every year up to 4% of your annual income. If you are earning $50,000, the total amount your employer would contribute is $2,000. You can contribute more than 4%, although your employer won’t match it.

Even if you have multiple 401(k) plans with different employers, the total employee contribution plan stays the same if you have multiple 401(k) plans with different employers. Multiple plans don’t mean a higher contribution limit.

The IRS adjusts 401(k) plan contribution limits annually for inflation.

Review your beneficiaries

Life is a journey and is constantly changing. One moment you could be getting married or divorced, and the next, there could be a birth, death or a significant financial shift in the family. Years ago, you may have named a charity as one of your beneficiaries, and now it no longer exists. Because the 401(k) is in the background, you can easily forget about it. However, it is critical to review these details periodically, for example, at the end of the year to ensure the beneficiaries are current.

Retirement account beneficiary designations hold precedence over will and trust directives. Suppose somebody is listed as a beneficiary on your retirement account, but someone else is on your will and trust directive. In that case, the retirement account will generally determine who gets the money.

Maximize your tax benefits with a 401(k)

Contributing to a 401(k) is done on a pre-tax basis. This allows you to deduct your contributions in the year you make them, lowering your taxable income. However, this benefit only applies to traditional 401(k) plans, not Roth 401(k) plans. If invested, the money in a traditional 401(k) can accrue interest on a tax-deferred basis, meaning dividends and capital gains that grow within your 401(k) are not subject to tax until you start withdrawing. The RMD (required minimum distribution) age for 401(k)s is 73, expected to increase in the next few years. A 401(k) is particularly attractive if you believe you'll be in a lower tax bracket in retirement.

Sign up for direct deposit

There are a few benefits to using direct deposit, the electronic funds transfer process where employers can transfer wages directly into an employee’s bank account. Direct deposit allows for convenience, efficiency, and potentially heightened security. However, there is always the risk of a data security breach, so monitoring your direct deposit payments is essential. There is also an element of enhanced privacy and control when you use direct deposit. Time sensitivity for receiving and cashing the check is no longer an obstacle. Money can automatically be withdrawn from the check and contributed to a savings account. Direct deposit has more pros than cons, but you should make a careful, informed decision- before deciding to use this money transfer method. A financial professional can help you determine if it aligns with your financial situation.

Consult a financial professional

The money put into a 401(k) plan can be invested in stocks or bonds. Otherwise, it will remain in the account as cash. With any investment, risk is involved, and getting help from a financial professional can help you with managing risks that might arise and confidently grow your wealth over time. Some people may be hesitant to seek out the help of a financial professional because they think it is only for the wealthy. However, financial services can be affordable and help you save money over time.

Important Disclosures:

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by LPL Marketing Solutions

Sources:

401(k) Contribution Limits for 2023 – Forbes Advisor

10 Tips for Managing Your 401(k) Account | Nasdaq

How 401(k) Matching Works (investopedia.com)

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