401(k) Decisions Before December 31

Critical year-end decisions for your 401(k) to maximize employer match, tax benefits, and investment growth

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Year-End 401(k) Action Items

December 31 is the deadline for many critical 401(k) decisions. Missing these deadlines means losing valuable tax benefits and potentially leaving employer matching contributions on the table. Strategic moves now can add thousands to your retirement savings.

2024 Contribution Limits

  • Under age 50: $23,000 maximum contribution
  • Age 50+: $30,500 maximum (includes $7,500 catch-up)
  • Total limit (employee + employer): $69,000 ($76,500 age 50+)
  • Highly compensated employees: May face additional limits

Maximize Employer Match

Don't Leave Free Money on the Table

Employer matching is free money—but only if you contribute enough to capture it all:

  • Common match: 50% of contributions up to 6% of salary (3% total match)
  • Example: $100,000 salary with 6% contribution = $6,000 from you + $3,000 match
  • Missing the match = missing instant 50-100% returns
  • Check if match requires full-year employment

Beware of Matching Cliffs

Some employers only match if you're employed on December 31 or work the full year. If you're planning to leave your job, time your departure strategically or you could lose thousands in matching contributions.

True-Up Contributions

If you maxed out contributions early in the year, you may have missed match:

  • Problem: You contributed $23,000 by June, no contributions July-December
  • Result: Employer only matched January-June payroll
  • Solution: Some employers "true-up" the match in December
  • Action: Check if your plan offers true-up and verify you'll receive it

Contribution Strategy

Front-Loading vs Spreading

Front-Loading Strategy

Method: Contribute maximum as early in year as possible

Pros:

  • Maximum time in market for growth
  • Dollar-cost averaging reversed (could be good or bad)
  • Guarantees you hit limit

Cons:

  • May miss employer match if no true-up
  • Reduces cash flow early in year

Spreading Strategy

Method: Contribute evenly across all pay periods

Pros:

  • Captures full employer match every paycheck
  • Dollar-cost averaging benefit
  • Consistent cash flow impact

Cons:

  • Less time in market
  • Risk not hitting contribution limit

Year-End Contribution Boost

Have You Maxed Out?

Check if you're on track to hit the annual limit:

  • Log into your 401(k) account
  • Review year-to-date contributions
  • Calculate remaining paychecks
  • Determine if you need to increase contribution rate

Last-Minute Contribution Increase

If you haven't maxed out and want to:

  • Contact HR or payroll immediately (early December)
  • Increase contribution percentage for remaining paychecks
  • Some plans allow one-time bonus contributions
  • Contributions must come from your December paychecks to count for 2024

After-Tax Contributions & Mega Backdoor Roth

Beyond the $23,000 Limit

If your plan allows, you can contribute more through after-tax contributions:

  • Total limit (employee + employer): $69,000 ($76,500 age 50+)
  • After pre-tax contributions and employer match, remaining room for after-tax
  • Example: $23,000 pre-tax + $10,000 match + $36,000 after-tax = $69,000 total

Mega Backdoor Roth Strategy

If your plan allows in-service distributions or conversions:

  1. Make after-tax 401(k) contributions
  2. Immediately convert to Roth 401(k) or roll to Roth IRA
  3. Future growth is tax-free forever
  4. Can contribute tens of thousands beyond regular limits

Check Your Plan's Features

Not all plans allow this. You need:

  • After-tax contribution option
  • In-service distribution or in-plan Roth conversion
  • Consult your plan administrator

Investment Selection Review

Review Your Current Allocation

Year-end is perfect for reviewing investment choices:

  • Have you maintained your target asset allocation?
  • Are you too conservative or aggressive for your age?
  • Are you paying unnecessary fees?
  • Have better fund options been added?

Common 401(k) Investment Mistakes

  • All in company stock: Dangerous concentration risk
  • Too conservative too young: Missing growth potential
  • Never rebalancing: Drift from target allocation
  • Chasing past performance: Buy high, sell low
  • Paying high fees: Expense ratios over 0.5% are typically avoidable

Target-Date Funds vs Self-Directed

  • Target-date funds: Set-it-and-forget-it, auto-rebalancing, age-appropriate
  • Self-directed: More control, potentially lower fees, requires monitoring
  • Decision factors: Investment knowledge, time commitment, available fund options

Beneficiary Designations

Critical Year-End Review

401(k) assets pass directly to named beneficiaries, bypassing your will:

  • Review primary and contingent beneficiaries
  • Update after marriage, divorce, birth, death
  • Consider per stirpes (by branch) designations
  • Ensure beneficiary form is on file with plan administrator

Beneficiary Mistakes Can Be Costly

  • Ex-spouse still named could receive everything
  • No beneficiary means probate and potential taxes
  • Minor children as beneficiaries requires court-appointed guardian
  • Estate as beneficiary loses stretch IRA benefits

Roth 401(k) vs Traditional 401(k)

Choosing Between Roth and Traditional

Traditional 401(k)

Best if:

  • High current tax bracket
  • Expect lower taxes in retirement
  • Want immediate tax deduction
  • Need lower taxable income now

Roth 401(k)

Best if:

  • Lower current tax bracket
  • Expect higher taxes in retirement
  • Want tax-free retirement income
  • Expect significant investment growth

Split Strategy

You don't have to choose one—many plans allow splitting contributions:

  • Hedge against future tax uncertainty
  • Create tax diversification in retirement
  • Common split: 70% Traditional, 30% Roth
  • Adjust based on personal tax situation

Changing Jobs? Critical Decisions

Four Options for Old 401(k)s

  1. Leave it: If plan is good and balance meets minimum
    • Pros: No action needed, stays invested
    • Cons: Hard to track, limited to plan's options, fees may be higher
  2. Roll to new employer's 401(k): If new plan accepts rollovers
    • Pros: Consolidation, continued tax deferral, potential for loans
    • Cons: Limited to new plan's investments
  3. Roll to IRA: Most flexible option
    • Pros: Unlimited investment choices, lower fees, easier beneficiary options
    • Cons: May lose creditor protection, complicates backdoor Roth
  4. Cash out: Generally a terrible idea
    • Cons: 10% penalty + income taxes + lost growth potential
    • Never recommended except extreme emergencies

Loans and Hardship Withdrawals

401(k) Loans

You can borrow from your 401(k), but should you?

  • Limit: Lesser of $50,000 or 50% of vested balance
  • Repayment: Typically 5 years (longer for home purchase)
  • Interest: Usually prime rate + 1-2%, paid to yourself
  • Risk: If you leave job, full balance often due within 60 days
  • Cost: Lost investment growth during loan period

Year-End Loan Considerations

If you have an outstanding 401(k) loan and are changing jobs or retiring before year-end, the unpaid balance becomes taxable income plus 10% penalty if under 59½. Plan accordingly.

Required Minimum Distributions (RMDs)

For Current Employees Age 73+

Generally, you don't have to take RMDs from your current employer's 401(k) while still working (unless you own 5%+ of company). But if you're retired:

  • Must start RMDs by April 1 after turning 73
  • Calculate RMD based on prior year-end balance
  • 25% penalty for missing RMD (reduced from 50% under SECURE 2.0)
  • Consider rolling to IRA for more distribution flexibility

Year-End 401(k) Checklist

  • ☐ Verify year-to-date contributions and remaining limit
  • ☐ Confirm you'll receive full employer match
  • ☐ Check if true-up contribution applies
  • ☐ Increase contribution rate if not on track to max out
  • ☐ Review current investment allocation
  • ☐ Rebalance if portfolio has drifted
  • ☐ Check expense ratios and consider lower-cost alternatives
  • ☐ Review and update beneficiary designations
  • ☐ Evaluate Roth vs Traditional contribution strategy
  • ☐ Explore after-tax contributions if maxed out
  • ☐ Research mega backdoor Roth if plan allows
  • ☐ If changing jobs, decide on old 401(k) rollover
  • ☐ If age 73+, ensure RMD taken if required
  • ☐ Review outstanding loans if changing jobs
  • ☐ Document all changes for tax records

Don't Wait Until December 31

Many year-end 401(k) changes require action through payroll, which may have early December deadlines. Review your situation now and make necessary adjustments while there's still time. Your future self will thank you for maximizing your retirement savings today.