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The Smart Way to Contribute 401k Max for 2020 Tax Year

The contribution limits for 401(k) for tax year 2020 is $19,500. If you are 50 and above its $6,500 extra.

Now if you are planning to contribute the max amount there are a few ways to do it.

$19,500/12 will be the most common way i.e. $1,625 each month.

Here’s how I have done in the past.

For the Tax Year 2019, the limit was $19,000 so I contributed $4,750 for the first 4 months of 2019. Why? Because you will get your money earlier in your 401k and it will have more time to grow tax-deferred…remember 401k is tax-deferred, not tax-free!

Most 401(k) providers (talk to your HR) will have the option to change and/or stop contributions whenever you want. You will have to notify them in advance.

Make sure you set yourself a calendar reminder of when you will stop the contribution,

Let’s say for 2020 you have already contributed $1625 for 4 months – so $6500 today. Now you have $13,000 remaining more to contribute. You can tell your HR that you want to change your contribution to either $3250 (for the next 4 months) or $6500 (for the next 2 months. Got it?

This will put more money due to higher tax-free growth in your 401k.

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