How to Increase 401(k) Contributions

Can I contribute a large lump sum to my 401(k) outside of a payroll deduction to minimize my tax bite and get closer to contributing the maximum for the year?

Pre-tax contributions to your 401(k) must be made through payroll deduction, so you can’t add outside money to boost your tax break. But there are a few ways you can increase your contributions near the end of the year to get closer to the $17,000 maximum for 2012 ($22,500 if you’re 50 or older this year).

Some employers let you contribute year-end bonuses to your 401(k) if you designate the money before the check is paid. And most employers allow plan participants to change the amount earmarked for their 401(k) at any time. A change to your contribution level usually takes one to two paycheck periods to take effect, says Patti Bjork, director of retirement research for Aon Hewitt, one of the largest 401(k) administrators. Some employers let you contribute a fixed-dollar amount from each paycheck. Others require you to specify a percentage of your pay -- plans administered by Charles Schwab typically limit contributions to 50% to 80% of your salary, for example. And some employers set a lower percentage for highly paid employees.

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If you do increase your contributions for your last few paychecks, make sure your plan cuts off contributions when you reach the $17,000 or $22,500 limit. Also notify your employer if you contributed to another employer’s plan earlier in the year, so those numbers will be counted toward your maximum.

And reassess your contribution level during open enrollment for 2013. You may want to lower the level starting in January and spread out your contributions over the entire year, especially if your employer’s match is based on each time you contribute (such as dollar-for-dollar up to 6% of pay) rather than your total contributions for the year.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.