Dear Alpha Consumer,
I contribute 10 percent of my income to my 401(k), which turns out to be around $14,000 a year. But if I get a raise next year and that 10 percent exceeds the $15,500 annual limit for contributions for people under 50, then what will happen? Will someone tell me that I've reached the annual limit, or will I get the money back in some way? Is there a way to contribute exactly $15,500?
I took your question to Sri Reddy, head of retirement income strategies for ING U.S. Wealth Management. He says that there is no need to worry, because once you hit the maximum, your contributions will automatically stop (and you will see a bigger paycheck as a result).
But Reddy does have one suggestion for you: Instead of saving more earlier in the year and then stopping by, say, July, lower your contribution rate so you are saving a consistent amount throughout the whole year. That way, you will be sure to receive your full company match. Reddy says that if you max out your contributions early, you could lose the match for the remaining months.
So consider turning that 10 percent into a 9 percent contribution (or whatever percentage will bring you close to saving $15,500 for the year) once you get your raise. You can save the extra money in your paycheck in a taxable account—or use it to celebrate.