The year-end 401(k) Hack you should try

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Maxing your 401(k) or TSP will help you get to this Happy Place faster…

There’s a lot of debate about how much you should put in to your TSP or 401(k) plan every year, and whether you should ‘front-end’ load your 401(k) at the beginning of the year, dollar cost average during the year, or back-end load your 401(k) at the end of the year for tax planning.

Here’s a 401(k) hack that works for me at the end of every calendar year.

First of all, faithful Gubmints readers know that you should never pass up on free money.  In the case of Uncle Sugar employees, make sure you put 5% in to your TSP every year so you max out the free Match (the 5% TSP match) the government gives you.

Now that you’ve done that, here is a trick many of you can try towards the end of each year to boost your 401(k) savings- Without affecting your take-home pay at all. This works best for medium- to higher income earners who make more than $127,000 per year.

Like most employees, I dollar-cost average in to my employers’ 401(k) program, the same amount every paycheck.  But towards the end of the year, I’ve noticed in many years that I somehow get a take-home pay ‘boost’ during the last few pay periods of the calendar year.

This phenomena is known as hitting the Social Security Tax Cap.

Per the Social Security Regulations, in 2017 the maximum taxable wage base is $127,200, and the associated Social Security Tax (sometimes listed as OASDI) rate is 6.2%.  This equates to a salary withholding maximum of $7886.40 per year (in 2017).   Once you’ve had $7886.40 in Social Security Taxes withheld, you’re done for the rest of the year (Note that the maximum SS Wage Base creeps up to $128,700 in 2018, which is a maximum Social Security Tax contribution of $7979.40 in 2018.  But I’ll refrain from discussions about Stealth Tax Hikes here).

So what to do if you are fortunate enough to earn more than $127K per year?

Do what I do – Watch your pay stubs towards the end of the year.  When your Social Security tax withholding gets close to the maximum amount ($7886.40 in 2017), note what your Social Security Tax payment was in every previous pay period, and increase your 401(k) contribution per pay period by the same dollar amount.  Or as an alternative, you can switch your salary contribution from ‘regular’ 401(k) to Roth 401(k) and you won’t feel as much of a sting in your take-home pay.

What else to watch for –

This only works until you hit the maximum annual salary deferral limit for a 401(k) or the TSP –  which is $18,000 in 2017.  But for the super-savers out there who have maxed out 401(k) savings, you still may have the option of setting up an allotment or other direct deposit if you want to keep your take-home pay the same after you’ve maxed out your Social Security Tax for the year.

… and don’t forget to re-set your 401(k) contributions to their ‘normal’ settings come January, or your first pay check in the New Year will be rather ‘skinny’ 🙂

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