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Writing a Check to Your 401(k): When You Can (And Can’t)

By Justin Pritchard, CFP®

When you want to save more in your 401(k), writing a check may seem like a reasonable approach. But 401(k) plans are workplace retirement plans. As a result, you often can’t write a check to your 401(k) plan to add money. Instead, the funds typically need to come out of your paycheck (through your employer’s payroll process).

That said, there’s probably a solution to whatever you’re trying to accomplish, and the options may be different for self-employed individuals, loans, and other situations.

Can’t I Just Write a Check?

For most workers, the answer is no. Your regular contributions to your 401(k) account typically only happen through “salary deferral.” In other words, the Payroll department needs to send money, and you can’t just write a personal check if you’re hoping to invest a large chunk or reach the maximum contribution limit by the end of the year.

Why not? For starters, the law does not allow you to defer funds that you already received. If the money is in your checking account, you received it. Also, your 401(k) plan (or the plan service providers who handle money and operate the plan) might have specific rules saying you can’t make your own payments into the plan.

Catch-up contributions: Those over age 50 can make additional catch-up contributions to retirement accounts. But 401(k) catch-up contributions, like other employee contributions, generally must go in through payroll deduction.

Except When You Can

There are several circumstances when you can write a check to your 401(k) account. These options are not frequently available to salaried employees, but occasionally, one of them applies.

Woman looking surprisedLoan repayment is probably the most common reason that W-2 employees make lump sum payments into their 401(k) plans. If you come into some money or leave your job with a loan outstanding, you should have the option to pay off the debt early. To do so, you can often write a personal check—but check with your plan administrator to see if another form of payment is required (like a cashier’s check or wire transfer).

Self-employed individuals might write checks when making contributions to their small business retirement plans. You’re both the employer and the employee, so one might argue that the employer is writing the check. That way, it looks just like the funds are coming from payroll, and that may be the case (hopefully it is—you don’t want to take chances with the IRS). To keep things cleaner—for the IRS, your bookkeeper, and yourself—it’s ideal to use a dedicated business checking account and contribute to your retirement plan from that account (as opposed to writing a personal check). It can be risky and confusing to combine personal funds with business funds. If you’re incorporated, it’s probably even more important.

After-tax contributions by check might be an option. But it depends on the types of plan you have available (is it just a 401(k), or are there other plans as well?) and the rules your service providers set. Other than “mega backdoor Roth” strategies, most people aren’t looking to write a check for an after-tax contribution, but it’s worth knowing about.

Just ask. It is always wise to ask your plan administrator before you rule anything out or take any action. Articles on the internet (although well-intentioned—and sometimes even accurate) may not be up-to-date, correct, or applicable to your situation. Go to the source and ask for confirmation. There might be a technicality or creative solution enabling you to do exactly what you want.

The Next Best Thing

When you can’t write a check to your plan, there may be other ways to add significant amounts of money. The question is usually how quickly you can get the funds into the 401(k).

Increase contributions: If there are still multiple pay periods left in the year and you’re not already maxing out, increase your contributions. But verify that you won’t give up any matching money. In many 401(k) plans, you can contribute as much as 100% of your pay (up to the annual maximum limits published by the IRS). Years ago, the limit was 15%, but it’s rare for plans to keep those low limits.

  • When to do it: Your plan might limit when you can make changes. Some plans allow you to change immediately or monthly, while others restrict these changes to quarterly or annual periods. If you’re thinking of going this route, contact your plan administrator as soon as possible.
  • Funding sources: When you contribute 100% of your pay to the plan, you naturally lose income. But if you were planning to write a big check, presumably you have plenty of cash on hand. Instead of taking income from your employer, pay yourself out of that extra money.

Will you miss matching funds? If your employer matches you contributions, you might lose out on matching funds if you make substantial contributions to the 401(k) plan. Some plans calculate the match per-pay-period (as opposed to per-year). If that’s the case, you probably want to contribute at least the amount required to maximize the match every pay period. If you start making large contributions to the plan and reach the maximum annual limit early in the year, you won’t be allowed to contribute in future pay periods. As a result, you could lose out on free money unless there’s an annual “true up” calculation.

Save Elsewhere

In some cases, increasing your contribution isn’t possible (or it’s not an attractive solution). Fortunately, there are other places to save money, some of which have tax benefits.

Individual retirement accounts (IRAs) may have features similar to your 401(k) when it comes to tax treatment, although the contribution limits are lower. You might be able to make pre-tax contributions to an IRA (verify with your tax preparer before you do anything), or you might choose to make after-tax contributions. You can possibly even make Roth contributions for the potential to take the money back out tax-free in retirement. Either way, the money in your IRA typically grows like the money in a 401(k): Growth is not taxed annually, and it might not ever be taxed. An exception worth mentioning is if you’re using certain investments that cause tax consequences, but most people do not use those investments.

Health savings accounts (HSAs) have impressive triple-tax benefits, but they have limited availability and relatively low contribution limits. Money goes in pre-tax, there’s no annual taxation, and funds can potentially come out tax-free when used for qualified medical expenses. There’s no “use it or lose it” feature, so you don’t need to spend the money each year. It may make sense to contribute to an HSA, invest the funds in a way that matches your goals, and wait until retirement to spend the money. Be sure to check with your health insurance provider and your CPA to determine if you’re eligible to contribute to an HSA.

Taxable accounts don’t have tax benefits, but they’re still an excellent place to save and invest. Unlike your 401(k) and IRA, the earnings in a taxable account usually need to be reported to the IRS as you earn them. That may slow the process of compounding some, but you’ll end up with a chunk of money that’s more or less free for the taking (although you may have unrealized capital gains when you eventually sell). Even if a taxable account is your least-favorite option, saving money somewhere is always a good move. Taxable accounts can be bank accounts or investment accounts using any investment mix you want—from conservative to aggressive.

What Now?

You’ve got multiple options. First, ask your 401(k) provider if you’re allowed to just write a check to the plan (better yet, ask “when” or “how” you might be allowed to do so). Next, evaluate IRA accounts and HSAs, keeping your current tax situation and eligibility in mind. Finally, stick the money wherever you can, and revisit this decision every year—maybe next year you can increase your 401(k) contributions and spend from your cash.

Let’s make a plan. We can strategize how you might maximize your contributions — and answer any other questions on your mind. Pick a time for a quick introductory call, or download some of my freebies to help you plan and invest.

 

Important: The decisions you make here can affect your taxes. Speak with your tax advisor and plan administrator before making a decision, taking action, or ruling anything out. This article may not apply to your situation or to current conditions.