Adding Money to your 401k by Check

401k plans are workplace retirement plans. Unfortunately, that usually means you can’t just write a check to your 401k to add money – the funds need to come out of your paycheck. If you’ve got extra money in the bank and you want to get it into your 401k, you’ll have to get creative.

There may be a way to do whatever you’re trying to accomplish, but the solution might look different from what you had in mind.

Can’t I Just Write a Check?

In most situations, the answer is no. Regular contributions to your 401k account can 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 unload cash or reach the maximum contribution by the end of the year.

Why not? There are several issues to contend with. For starters, the law does not allow you to defer funds that you already received. If the money is in your checking account, you’ve received it. Also, your 401k plan (or the plan provider who handles money) might have specific rules that say you can’t make your own payments to the plan.

Except When you Can

That said, there are a few circumstances when you can write a check to your 401k account. These options are not frequently available to salaried employees, but occasionally one of them will apply.

Loan repayment is probably the most common reason that W2 employees (that is, people who don’t own the business) make lump sum payments into their 401k 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 simply 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).

Checkbook Cover

Don’t break out the checkbook just yet. Photo Credit: Amanda. CC-BY-2.0

Self-employed individuals may have good reason to just write checks when making contributions to the retirement plan. You’re both the employer and the employee in that situation, so one could argue that the employer is the one writing the check. That way, it looks just like the funds are coming from payroll, and that may, in fact, be the case (hopefully it is – you don’t want to take chances with the IRS).

If you wanted to keep things cleaner – for the IRS, your bookkeeper, and yourself – you’d ideally have a separate checking account for your business and contribute to your retirement plan from that account. It’s risky and confusing to combine personal funds with business funds.

After tax contributions by check might be an option, but it depends on the type of plan you have (is it just a 401k, or are there other plans “attached”?) and the rules your service providers have set. Most people aren’t looking to write a check for an after-tax contribution anyway, 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 that allows you to do exactly what you want.

The Next Best Thing

If 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 401k.

Increase contributions: if there are still a few pay periods left in the year and you’re not already maxing out, increase your contributions – unless you’ll give up matching money. In many 401k 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.

Note that 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.

When you contribute 100% of your pay to the plan, you’ll naturally lose income. However, if you were planning to write a big check, it’s a fair assumption that you have plenty of cash on hand. Instead of taking income from your employer, pay yourself out of that extra money.

Losing the match: if your employer matches contributions to the 401k plan, you might lose out on matching funds if you make substantial contributions to the 401k 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 able to contribute in future pay periods – so you’ll lose out on free money.

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 with tax benefits.

Individual retirement accounts (IRAs) are similar to your 401k when it comes to tax treatment. You might be able to make pre-tax contributions to an IRA (ask your tax preparer for confirmation 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 grows like the money in a 401k: 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.

Taxable accounts don’t have any tax benefits, but they’re still a good place to save and invest. Unlike your 401k and IRA, the earnings in a taxable account will 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.

Wrapping Up

To recap, you’ve got multiple options. The first step is to ask your 401k 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, 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 401k contributions and spend from your cash).