The calendar is about to turn to June – and that means nearing the halfway point of 2025. For those contributing to 401k, 403b and TSP accounts, adjustments or tweaks at this time can make a real difference overall for the current tax year and future savings overall.
The most basic considerations are in the dollar amount and tax classification of how 401k/403b/TSP contributions are made.
Dollar amount:
- 401k, 403b and TSP plans operate on either a percentage amount or dollar amount of contribution per paycheck.
- Even if a person contributes on a percentage basis (3%, 7%, 10%), know how much those contributions mean in Dollars. Knowing the literal dollar amount can lead to more effective goal setting and data for increasing contributions.
- In any event, try to increase the contribution amount – a change made now can mean thousands of dollars more in contributions by year-end.
- Lots of people choose to max out contributions to 401k and 403b plans. That means time may be running out to make meaningful changes for this year. (Those in this category know what I am talking about). So, act fast on the next item!
Tax classification:
- Most 401k, 403b and TSP plans allow participants to choose between “traditional pre-tax” or Roth contributions – or a combination.
- Pre-tax contributions come with a tax deduction today… but with taxes paid later on required distributions (RMDs) from the accounts which typically grow over 20 to 30 years.
- Roth contributions are made after-tax, and then grow tax free, with tax free withdrawals and NO RMDs someday.
- There are no limits on compensation with Roth 401k contributions – unlike Roth IRAs that have income limits.
- At this critical time of year, if a participant is NOT currently contributing even a portion to the Roth 401k/403b, a change today can make a meaningful difference by year-end (and to the start of next year too).
- How much makes sense to contribute to the Roth 401k/403b? This depends on a combination of personal preference, financial adviser advice and, most important, the advice of a tax professional.
- For starters, designating 50%/50% to each the pre-tax and Roth often can make sense.
For those without access to a 401k, 403b or TSP employer benefit, there are other less urgent – but still important – solutions with tax efficient consequences to consider. Use this mid-year timing wisely.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.