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Vacation Pay in Your 401k

President Obama has announced new rules that will let workers transfer money they receive for unused vacation or sick days into their 401k.  (See article in Washington Post.)  However, employees are still subject to the same total contribution limit, so this is not a way to get around that cap (which is currently $16,500; see more details from the IRS.)

We like the idea, but with a caution.  We believe in vacations.  We at abcInvesting.com all take vacations.  We recommend them.  So don't work every day of the year just to put a bit more into your 401k.

However, if you end up with a few unused days of vacation at the end of the year, then the 401k is a great way to use those days.  If you get two weeks of vacation, but have trouble saving money in your 401k, maybe you cut back to 7 or 8 days of vacation and put the rest into your 401k.

As with most 401k issues, the change in government regulations is not the complete story.  Your particular employer must also approve a change in the 401k plan to allow the use of vacation pay for retirement contributions.   Check with your human resources department to see if your company is going to participate.

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