At the start of a new year, it’s a good time to review your contributions to your employer’s retirement savings plan.
With contribution limits resetting, potential raises going into effect, and a new tax year underway, a thoughtful review can ensure your retirement goals stay on track—especially if you’re considering taking a sabbatical.
You may wonder, “Should I continue contributing if I’m planning to take a year off?” or “How do I balance pausing work with saving for retirement?” The answer depends on your future goals, but there are key strategies to help guide your decisions.
As financial planners, we always aim to keep your goals the center of all the work we do. Here’s how to review your contributions with both your long-term retirement goals and sabbatical plans in mind:
5 strategies to consider when reviewing your employer retirement savings contributions
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1. Consider Your New Salary and Timing Your Contributions
If your salary has changed, review the contribution percentage for this tax year. Contribution amounts are typically set as a percentage rather than a fixed dollar amount. A change in salary and an updated max contribution limit might require an adjustment to ensure you’re saving the amount you intend.
Be mindful of the timing of your contribution changes. Sometimes the change can take 1-2 pay cycles to go into effect. Think about your contributions for the months remaining in the current calendar year and adjust as needed!
And know that you can often adjust your contribution percentage multiple times in the same year, so check back after a few months to make sure you’re on track.
🌎 Sabbatical Strategy Example:
If you’re planning to take a sabbatical in July, you might want to front-load contributions from January to June. This is because contributions typically have to come from salary deferrals. If you’re not earning a salary, no contributions can be made.
Note that there still may be the option for you to contribute to a Traditional or Roth IRA during your sabbatical year, depending on your income for the year.
2. Max Out Smartly to Optimize Employer Matching Contributions
Check whether your employer’s contributions are a match or a flat contribution. If it’s a match, your employer can only contribute when you’re actively contributing yourself.
🌎 Sabbatical Example:
Let’s say you plan to go on sabbatical next June, so you get ahead of things and plan to hit the annual maximum contribution ($23,500 for 2025) by June of this year as well – as a trial run for how cashflow might feel next year.
But wait, if your employer offers a matching contribution, you may miss out on those contributions after June of this year, while you’re still working. To avoid this, consider spreading your contributions throughout the entire year you earn a salary, and verify how your employer handles matches for sabbaticals or leaves of absence. Then reset your contributions for your actual sabbatical year according to what you’ve learned.
3. Evaluate Pre-Tax vs. Roth Contributions Based on Future Goals
Employer retirement plans often offer pre-tax and Roth contribution options. Take time to review which is best for your sabbatical and long-term plans.
- Pre-tax contributions: These reduce your taxable income for the current tax year and are ideal if you anticipate moving to a lower-tax state or plan to have a significant reduction in taxable income in the future.
- Roth contributions: These are great if you’re above the income threshold for a Roth IRA or prefer to pay taxes now, assuming you’ll be in a higher tax bracket when you retire.
🌎 Sabbatical Tips:
If your income will be lower during your sabbatical year, consider shifting to Roth contributions during that year. That way, you’ll pay taxes at a lower rate and build a tax-free savings bucket for retirement. And as of the end of 2022, you may even have the option to direct your employer match to be a Roth contribution as well!
🌎 Bonus Sabbatical Tip:
If your cashflow allows for it, some employer retirement plans allow for after-tax contributions. These contributions do not offer a tax benefit this year, and growth will be taxed when the money comes out of the plan, but this is a way to set yourself up to do a Mega Backdoor Roth contribution. This could apply to you if you have excess income that you’d like to save for retirement – i.e. you’ve already maxed out your $23,500 contribution (plus catch-ups) limit and but want to save more – and your current income makes you ineligible to contribute to a Roth IRA directly. The strategy itself is beyond this post, so feel free to reach out to us if you want to learn more!
4. Make Catch-Up Contributions if You’re 50 or Older
If you’re 50 or older, you can save an additional $7,500 (bringing your total contribution to $31,000 in 2025) to your employer retirement plan.
🌎 Sabbatical Consideration:
If your sabbatical is approaching and you’re age 50+, increasing your contributions before you take time off might help you make up for a lower savings year during your break.
If you’re not quite 50 yet, it can be nice to know that you may be able to save more to your retirement plan after your sabbatical. So if you take your foot off the savings gas while you’re on sabbatical, know that you may have an opportunity later in your career to catch up on contributions.
As an added benefit, there is a special catchup provision for when you are ages 60-63. You can contribute an additional $11,250 (up to $42,250 in 2025) during those years. So thinking about retirement savings over years vs. just the months of the current year can also be helpful in relieving anxiety about retirement savings while you’re planning for and going on a sabbatical.
5. Coordinate Contributions Across More Than One Employer Plan
If you contribute to multiple employer plans, you’ll need to be mindful of aggregate contribution limits. Coordinate with your HR representatives to avoid excess contributions.
🌎 Sabbatical Example:
If you max out an employer retirement plan from January to June of your sabbatical year and then return to another job in December, you will want to wait until a new calendar year to start contributing to your new retirement plan. That’s because you’ve already met your annual max contribution for the year. Note that IRA contribution limits are separate from employer plan max contributions.
Learn about the limits here.
Planning Retirement Contributions Around a Sabbatical
Taking a sabbatical doesn’t mean putting your retirement on hold—it just requires smart planning. By reviewing your contributions, employer match options, and pre-tax versus Roth strategies, you can stay on track financially while giving yourself the break you dream of.
If you’re unsure how to optimize your retirement savings strategy while planning a sabbatical, we can help you map out the right approach.
Schedule a discovery call today or email us at clientservices@middletonand.co to get started!
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taylor anderson
Taylor is a Certified Financial Planner (CFP®) with a knack for making complex concepts simple and visual. After taking a two-and-a-half-year sabbatical to join the Peace Corps and travel Southeast Asia, she now satisfies her travel itch by exploring the Northwest in her Sprinter van with her two boys. When she's not helping clients with financial planning, you'll find her backcountry skiing with her husband and Australian Shepherd.