Bonus on the way? Don’t forget to make this small tweak!
I previously wrote an article that gives you the 411 on all things 401(k)s. It focuses on high-level details like what it is, the difference between regular and Roth options, withdrawal rules…I’ll stop here before I spoil the whole thing! If you haven’t read it, I encourage you to do so. I bring this up because I recently got a reminder from my employer to adjust my 401(k) contribution rate before bonuses were paid, and I wanted to remind you, too! The examples below could be easily replicated by replacing the fake figures with your own.
Calculating Regular 401(k) Contributions
The amount you contribute to a 401(k) is a percentage of your paycheck rather than a set dollar amount. If your goal is contribute the maximum allowable amount ($24,500 for 2026), do a little math at the beginning of each year to determine what percentage of your pay will total $24,500. That will be your recurring 401(k) contribution percentage.
Contribution Calculation
Calculate the per paycheck dollar amount: $24,500 / 24 = $1,020.83 per paycheck
Divide the annual maximum allowable contribution ($24,500 in 2026) by the number of paychecks you’ll receive in a year. If you’re paid bi-monthly, you’d use 24. In this example, you should contribute $1,020.83 per paycheck to your 401(k) each pay period to reach the $24,500 maximum.
Calculate the percentage that dollar value represents: $1,020.83 per paycheck / $3,000 gross paycheck total = 34% per paycheck
Now, divide the per paycheck amount ($1,020.83) by the gross value of your typical paycheck (let’s use $3,000) to determine what percentage of each paycheck should be allocated to your 401(k). In this example, you should contribute 34% per paycheck to your 401(k) to reach the 2026 maximum. You use gross pay instead of net pay because pre-tax funds are those subject to the 401(k) contribution limit. (You can contribute post-tax funds, too, but that’s not what the limit applies to.)
Since we calculated the per paycheck contribution percentage based on a "normal" paycheck’s gross value, you will need to adjust the contribution percentage before your bonus is paid or risk throwing away employer matching contributions — aka, free money!
Employer Matching Contributions…the reason you should adjust your contribution rate
As an incentive for employees to contribute to their 401(k)s, employers can choose to throw in some money on top of employee contributions. This extra money is the employer match. Employer matching contributions aren’t required by law, so not all companies offer this incentive, but if they do, take full advantage of the free moolah. Here’s how to do that:
Read your benefits information to find the employer matching percentage, and plan to contribute at least that percentage to your 401(k) each pay period. Employers typically match somewhere between 4% and 6%, so if you aren’t in a position to max out your 401(k) right now, shoot to contribute at least the percentage that will score you the matching dollars.
Adjust your 401(k) contributions when you receive spot or annual bonuses. Why? 401(k) contributions are percentage based, so if you leave your contribution percentage as is and receive a hefty lump-sum bonus mid-year, you could risk maxing out your 401(k) before the last pay period of the year. This is why adjusting your contribution percentage before you receive a bonus is important! For every pay period you don’t contribute to your retirement account, you’re effectively throwing away employer matching dollars until the clock resets on January 1. (Note: It is possible to contribute after-tax dollars to your 401(k), but some employers don’t match after-tax contributions, so you’ll need to read your plan’s terms closely.)
Consequences of Not Adjusting the Contribution Rate
Now that you understand contributions and matching, let’s see how a bonus can affect your 401(k) contributions if you don’t adjust the percentage. Here are the details for our example:
Gross Paycheck Amount: $3,000
Regular 401(k) Contribution Rate: 34%
Bonus Amount: $5,000
Employer Matching Terms: 50% of the first 6%
Regular Pay Period Contribution: $3,000 x 34% = $1,020.83 contributed
Bonus Pay Period Contribution: $3,000 gross pay + $5,000 bonus = $8,000 x 34% = $2,720 contributed
Calculate the number of pay periods lost: $2,720 / $1,020.83 = ~3 pay periods. In this example, you’ll max out ~1.5 months early and forgo 3 employer match payments if you don’t adjust your percentage.
Match value lost: $3,000 x 6% = $180 x 50% = $90. Your employer matches $90 in each pay period when you contribute at least 6%. You’d sacrifice $270 by maxing out 1.5 months early. While this may not be a huge figure to you, it’s still money lost that you would have had otherwise!
Note: These figures are over-simplified. I recommend using a pay stub from your last bonus period to help you with the math.
Sad Fact: It’s tricky to contribute the exact $24,500 in 24 pay periods since contributions are percentage based and paychecks can fluctuate a bit from month-to-month. I lowered my contribution rate to my employer's matching percentage before my bonus was paid, and I still lost one pay period of matching in December. BUT that’s much better than the 5 I would have lost had I not adjusted the rate before the bonus was paid.
TLDR
Lower your 401(k) contribution percentage before your annual bonus is paid to avoid maxing out early and losing valuable employer matching dollars. This example was all about bonuses, but you’ll want to adjust your contribution percentage annually to account for any raises or other changes in income, too.