Be Wary of Frontloading Your 401(k) Contribution and Losing Company Match

See-saw-front-load-401k-contribution-company-matchJanuary is a great time to re-assess your retirement accounts.  It’s important to review your 401k contribution and at least consider re-balancing your accounts at the beginning of every year.  You’ve probably made a couple New Year’s resolutions so why not add this one to your list?  2013 will be the first official year I’m able to max out my 401k since last year I received a raise about halfway through the year so I just missed out on contributing the full $17,000.

If you’re making around 50-75k you should definitely be close to maxing out your 401(k) but it’s important to keep a balance between saving, spending and having fun!  Just remember though, every dollar you save at the beginning of your career is worth a lot more than a dollar saved in 20 or 30 years.  Why do you think ‘compounding’ is often referred to as the eight wonder of the world?  Once you’ve realized the power of compounding, saving will become a lot more fun, trust me.

How Do I Save $17,500 a Year?

The best way to save for retirement is to avoid lifestyle inflation.  Do you remember what you used to eat and do in college when you had no money?  Those are some of the best memories of my life and I had way less money then, than I have now.  Until you’ve maxed out your retirement accounts it’s a good idea to take every raise you get, whether it’s merit or performance based, and add that exact percentage to your 401k/IRA contribution.  That way, your paycheck will never decrease but it also won’t increase until you have your retirement accounts all maxed out.  You can also increase your 401(k) contribution by 1% each year and most 401(k) providers actually provide an option for automatic annual increases.

Don’t Lose Out on Your Company Match

Once you’ve maxed out your retirement accounts, there’s one last thing to consider.  Some people like to contribute the same amount each paycheck(dollar cost average) and some prefer to front-load their 401k contributions.  I think either method is fine but I prefer the diversity that comes with dollar cost averaging.

Front-loading your contribution does have one major pitfall though.  If your company provides a 401k match, you need to determine if the match is on a per paycheck basis or a salary basis.  Some companies will allow you to “true-up” your contributions which means that even if you front-load your contributions, behind the scenes, they will still count that as contributing each paycheck and give you the company match.  But others(like mine) will require you to contribute each paycheck in order to get the match until the end of the year.

Here’s an example of how you could lose out on part of your company match:

Joe the engineer makes $100,000 a year.  His company matches 5% of his 401k contribution.  In 2013, the max 401(k) contribution is $17,500 so he decides to front-load his contribution and contribute 26% of his paycheck to his 401(k).  If he gets paid bi-weekly(26 times per year), Joe will be contributing $1,000 every two weeks to his 401(k).  In the 36th week of the year, he’ll have maxed out his 401(k) and he decides to discontinue his contributions at this point.

Now where it gets tricky is that Joe’s employer matches 5% of his contribution and there is no IRS limit on this employer contribution(it doesn’t count as part of the 17.5k either).  So by front-loading his 401k contributions, Joe will no longer get his company match if he stops contributing.  Joe has 8 more paychecks left in the year so he’ll be missing out on $1,538.46 of company matching contributions{ (8/26) * (5% * $100,000) }.  Any contributions he makes after the 17.5k limit will no longer be deductible and some companies don’t even allow non-deductible contributions to a 401(k).

How to Avoid Losing the Company Match

The simplest way to avoid losing out on the company match is to make sure that you evenly distribute your 401k contributions.  At the beginning of the year, calculate what percentage you need in order to go just over the $17,500 limit per year.  If you get any raises or bonuses during the year though, you’ll need to re-calculate this number based on your higher paycheck(you’ll need to lower your %).  Every 401(k) plan is different so here are some things to watch out for and ask your plan administrator about.

  • Will you still receive the company match if you hit your IRS 401k contribution limit before the end of the year?
  • What happens to your contributions if you go over the $17,500 limit?
  • If I go over the $17,500 limit will the non-deductible portion of my contribution(anything over 17.5k) count towards company match?(The IRS has no limit on non-deductible contributions to a 401k but your company might).

Who would have thought so many problems could arise from maxing out your 401(k)?  My company requires me to contribute to my 401(k) every paycheck in order to get the match so I’m going to get as close as possible and probably stay just under $17,500.  That way my 401(k) will stay comprised of only deductible contributions.  I know that it would annoy the heck out of me if I had $17,500 worth of deductible contributions and $50 worth of deductible contributions.

Readers, have you maxed out your 401(k) yet?  Do you know if your company will “true-up” your contributions or do you have to contribute to your 401(k) every paycheck in order to get the match?

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-Harry @ PF Pro

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Hi, I'm Harry, the owner and head writer for Your PF Pro. I started this site back in 2011 in order to create a place where young professionals could come and get all of their financial questions answered. On the site, you'll find articles on everything from asset allocation for retirement to saving money at Chipotle! So enjoy..

Comments

    • says

      Oh wow that’s awesome that your company let you know about that. My HR department is kinda useless at times, it’s so hard to find out the information that you need. I usually just end up e-mailing them directly, I can only imagine how many e-mails they get.

  1. says

    I max out my 401(k). I updated my % back in December to reflect the $500/year increase. My employer lets you put up to 90% of your income into the 401(k) and there are no non-deductible contributions, so I set my % to be just over the max. This will be my third calendar year maxing it out :) It is pretty sweet watching the balance grow with the amount that goes into it each month!

    I’ve thought about frontloading it completely, but it’s such a large sum and would take 2-3 months to cover, so I’d rather dollar cost average over the whole year. Also, my employer does true-up the match, but only if you’re still employed there at the very end of the year. If I plan on changing jobs, then maybe I should max it out earlier. If I make the decision to change jobs halfway through the year, I would be pretty close to being able to finish maxing it out with one paycheck and do that with my last one, I guess.

    • says

      Yea it’s definitely nice contributing a lot in the beginning of your career since your returns are determined a lot more by your contributions than your return on investments.

      Generally, people do front-load for that reason. Since if you leave your job and start a new one, some companies will not let you contribute for the first 6 months to your 401(k). Sounds like you’ve got a good hold on things though.

  2. Bichon Frise says

    You also need to look out for nuances like a time limit on changes to contributions. My plan makes me ride out any changes for 6 months (it’s a stupid rule). My bonus comes in March/April, so I’ll make an adjustment then. My raise is applied in August, so in Nov/Oct I’ll calculate it out again at that time.

    Also, some companies (IBM being the latest) are applying the match in the form of a lump sum at the end of the year. If they have layoffs, I bet it will before the match is due!

    • says

      Wow I’m always amazed at some of the crazy rules out there. I know there’s an excessive trading limit on my 401(k) but it’s nothing like that.

      Seems like companies will do anything to get out of that match. I guess if I was running a business though, I’d probably do what’s in the company’s best interest when I have shareholders to report to.

    • says

      I’ve never heard of that haha! Your plan actually greatly favors lower earning workers since generally company match is based off a % of your salary. With your plan, it sounds like everyone gets the same match as long as their contribution amount is the same. Either way, I like that plan because it forces you to max out to get the full company match. There’s really no reason not to since you could always roll over later or even just take that money out and pay 10% penalty which would be offset by the 25% match.

      There is no federal limit on non-deductible contributions but I bet your company won’t match those, would be interesting to try it out though and see if maybe you found a loophole :)

  3. says

    Good post Harry! I would definitely try and dollar cost average the contributing, but would do it with an eye to get as much of the match as possible. I’ve read about how some companies ( I think IBM was the first to do it) are now starting to put in the match on an annual basis as opposed to each check. I think that’s a shame as the employee loses out on growing it throughout the year as well as DCA.

    • says

      Yea that’s what I’m going to have to do. But as I mentioned earlier, should I leave my job midway through the year I’d probably try and frontload the contribution since often new employers won’t let you contribute to a 401(k) for a few months. But if my new employer matches then I’d be missing out on that match. Kind of confusing huh?

  4. says

    Excellent article.However, I’m not sure you can contribute more than the allowable amount. The excess can’t be excluded from you income in the year you make the contribution. For example, if you contribute $2,000 extra, you must include that $2,000 as taxable income. Maybe things have changed, but I haven’t seen an update on this. Just keep this mind if contributing more.

    Good examples! :-)

    • says

      Thanks Ornella, that is correct. It is up to your employer to decide if they will allow you to contribute non-deductible contributions to your 401(k) once you hit the IRS limit of $17,500. Any money that you contribute beyond that will be subject to income tax so there’s not much of a benefit tax-wise. Would be smarter to do after-tax investing in a separate account with more freedom/less restrictions.

  5. james says

    Hi- If i’m leaving my company in august and starting with a new one in september, and that company matches my 401K “dollar for dollar up to the first 4 % of 40K eligible pay that you save”– can i maximize my new employer’s contribution by maxing out my contribution?

    For example, if my new job pays $100K/year, and I only have 4 months left in 2013- Is it still possible to get the $4000 company match in the last 4 months of the year in my new job if I maxed out contributions? Or will I be limited to what I get on my paycheck?

    • says

      Hi James, if you’ve already maxed out your contribution for the year then you’re out of luck. The IRS doesn’t care when/how you got the $17,500 into your 401(k) but once it’s there, you cannot contribute anymore. Is that what you did? If so, you could see if your new company will match a non-deductible 401(k) contribution. Usually, I don’t recommend a non-deductible 401(k) contribution but if you can get the 4% match then it’s definitely worth it.

      I think you may be mistaken on how your plan works since the match is 4% of 40k of eligible pay that you SAVE. If your new salary is 100k, then you will only be paid 33k for the next four months right? So you would get a 4% match on 33.3k which is $1,332 so you would only need to contribute $1,332 to get the full company match. Correct me if I’m mistaken but that’s how it seems from the 4% of 40k eligible pay that you SAVE..

      • james says

        Hi-

        I haven’t maxed out my 401K (only contributed about $5K this year so far). I was hoping that I could get a match of $4000 (100K X 4% match) in the last 3 months in my new company if I maxed out contributions and put in at least $4000. But I’m wondering how that 4% is determined, annually or by paycheck.

        • says

          You’ll have to check and see how your new company’s matching program works. Generally though, the 4% is per paycheck. So in the last 3 months at your company, whether you contribute 4% of your salary or 25% to your 401(k), the company will only give you 4% of your salary per paycheck as a matching contribution. Make sense?

  6. Paul says

    I front loaded my contribution for my 401k so I hit may max contribution at the middle of the year. My company does not have a “true up” policy so I am missing out on 6 months of matching contributions at 6%. Can I ask my company to consider an out of policy “true up” what are the restrictions or limitations on such a request?

    • says

      Yikes, that is a lot to be missing out on. I doubt they would allow you to do anything like that but see if they will allow for non-deductible contributions to be matched. You wouldn’t get the same beneficial pre-tax treatment but you would get the match and that alone would make up for it.

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