The 401(k) Rule That Matters Most Once You’re Within 2 Years of Retirement

If you plan on retiring in two years, it's more important than ever that you make the right money moves. With only two years left of working, this is your last opportunity to top up your retirement accounts before moving to a fixed-income lifestyle.

The rule that matters most right before retirement is maximizing your accounts as much as possible. Once you stop working, you don't have the ability to contribute to a 401(k) or take advantage of other opportunities, like employer matches and catch-up contributions. For those reasons, it's important to focus on maximizing your contributions and protecting your investments.

The importance of your last two years of work

Your last two years of work are the end of an era. You've worked hard for decades, and you've spent your career investing in your future. Your final years of working are a time to protect what you've built. While it might be tempting to invest in a new hot stock, your final years of work are a time to research, reflect, adjust, and plan.

What financial experts recommend

Financial experts at Fidelity recommend shifting to more conservative investments as you get closer to retirement age. Similarly, Charles Swab advises that people in their 60s should shift to a portfolio that's 60% stock, 35% bonds, and 5% cash.

When you're younger, you have the ability to weather market shifts and economic uncertainty. The closer you get to retirement, however, the less time you have to recover from severe market fluctuations.

How to maximize your retirement accounts

As mentioned, the most important step you can take when you're within two years of retirement is to maximize your retirement accounts. If you're between the ages of 60 and 63, one of the best ways to do that is to take advantage of catch-up contributions.

Because of the Secure 2.0 Act, workers who are in this age range can contribute an extra $11,250 to their retirement accounts. That, plus regular contribution limits and employer matches, means you have an opportunity to significantly add to your 401(k) before you retire.

Tax changes to keep in mind

There is another important 2026 change that affects high-income workers. Those who earn over $150,000 per year must make these catch-up contributions as Roth contributions. For some people, this is a benefit because they can withdraw retirement funds tax-free in the future.

Others might be disappointed by this rule because it means they won't be able to reduce their taxable income using traditional 401(k) contributions. If your goal is to maximize your 401(k) account before retirement, understanding the tax implications of doing so is an important part of developing an investment and retirement plan.

How 401(k) loans impact retirement

If your goal is to add as much as possible to your 401(k) account before you retire, taking out a 401(k) loan can be detrimental to that goal.

Data shows that 31% of workers have taken out a 401(k) loan. However, if you take money out of your retirement account as a loan, it can't grow in the market. With retirement so close on the horizon, taking money out early may delay your ability to stop working when you want to.

How 401(k) fees impact retirement

Research shows that 41% of workers have no idea they are paying 401(k) fees. Typically, these retirement account fees are hidden and hard to understand. Workers pay many fees they don't realize are coming out of their returns, including administration fees, expense ratios, and 401(k) management fees.

Taking the time to understand fees before you retire can help you to preserve the nest egg you've built.

Where to get 401(k) advice

Planning for retirement can get complicated. You'll need to think about timing withdrawals, cash flow, and how to make your funds last. You'll also need to consider how Social Security benefits will impact your overall income and tax strategy, too.

With so many scenarios to consider, it's a good idea to get 401(k) and retirement planning advice to ensure you're on the right track and avoid surprise tax bills. Consulting with a financial advisor and accountant can go a long way in helping you determine the best next steps as you transition to retirement.

Bottom line

Using your last two years of work to maximize your retirement savings can help you have a stress-free retirement. 

Taking advantage of catch-up contributions, reviewing your account fees, and consulting with experts can help you prepare yourself financially, reach your goal, and retire on time. Similarly, making smart choices and avoiding chasing big returns or hot stock tips can help you to preserve your wealth as you near retirement age.

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