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100% to 401(k) at Beginning of Year?
Old 12-04-2012, 03:30 PM   #1
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100% to 401(k) at Beginning of Year?

I'm toying with the idea of deferring 100% (after mandatory deductions, like health insurance) to my 401(k) until I reach the limit for the year, when I will make it 0%. This would allow me to ensure I contribute the maximum for 2013 in the event I finally get the gumption to ER next year, or get laid off, (or fired if my attitude doesn't change, possibly ).

I have enough cash on hand (outside of my emergency fund) to cover me for those months I would have no or very little take-home pay.

Anyone else do this? Are there implications I haven't thought of? For example, does it screw up tax withholding for the year?
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Old 12-04-2012, 03:34 PM   #2
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Do you have an employer match? If so, how is it structured?
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Old 12-04-2012, 03:41 PM   #3
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If I had a sugar momma to live with for a few months, I could do that...
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Old 12-04-2012, 03:47 PM   #4
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I do this because my employer does not "match", but contributes a percentage of salary after the end of the year.

My spouse cannot do this since for the most match, she must contribute every paycheck throughout the year.

Some employers use a "top-up" algorithm for folks who hit the limit early in the year to make sure folks do get a full match if they hit a contribution limit early in the year, but my spouse's employer is not one of them.

It hasn't screwed up my tax withholding, but I change my W-4 a couple times a year. Certainly, early in the year I have no income taxes withheld since my paycheck is too low. Later in the year, I have to have extra withheld and I have to check it in October to make sure I am not underwithheld for the year while I still have a chance to submit a new W-4 with different withholding.
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Old 12-04-2012, 04:08 PM   #5
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Do you have an employer match? If so, how is it structured?
Good point. I need to verify against the plan documents, but I don't recall any limit on match on a per-month basis, only as a function of my salary and amount contributed. I also need to consider that the match is all in company stock, and I only get the maximum match if I use a fair chunk of my deferral to purchase company stock. No limitation on selling, however, and I always sell at the first chance (which is 3 days after payday, after the purchase transaction settles).

I'm looking at this as equivalent to transferring money from my taxable account to my 401k, if I were to ER early- or mid-year next year.
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Old 12-04-2012, 06:22 PM   #6
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I would be surprised if your employer lets you withhold 100%. Usually limited to 30% or less.
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Old 12-04-2012, 06:44 PM   #7
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The year I retired I upped my 403b contributions to 50%, iirc, for that last 6 months Jan thru June. I did get short changed on the employer match because they did it on a per paycheck basis, not on an annual basis. Overall it probably wasn't a great $ amount difference, yet was a good idea to maximize my "last opportunity" & good practice to live with less income.
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Old 12-04-2012, 06:52 PM   #8
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If you won't shortchange yourself on the match, then what you plan would have the added benefit of being invested longer.

My former employer match was computed each pay period, so to do what you suggest would suboptimize the match. The way the match was structured encouraged you to spread your contributions over the year.

If you ER, you could always change it to 100% at that time. I did 100% with my vacation pay when I left work.
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Old 12-04-2012, 07:05 PM   #9
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The only example I am familiar with, the matching was on the first x% of salary. HOWEVER, salary was not an annual salary, but gross salary for the pay period. To get a match of x% of total annual salary would require contributions in all pay periods. Your company may be different, but doing the calculation by pay period prevents a December raise from allowing a much larger annual match.
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Old 12-04-2012, 07:46 PM   #10
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I would be surprised if your employer lets you withhold 100%. Usually limited to 30% or less.
Mine let us do a 100% of the net check - up to the annual limits, of course.
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Old 12-04-2012, 07:54 PM   #11
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I would be surprised if your employer lets you withhold 100%. Usually limited to 30% or less.

My employer (federal government) will allow me to contribute 100% of my bi-weekly pay if I want to.
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Old 12-04-2012, 07:57 PM   #12
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I would be surprised if your employer lets you withhold 100%. Usually limited to 30% or less.
My employer allowed 100%.
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Old 12-04-2012, 08:00 PM   #13
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We can do 25% to regular 401k plus 25% to catch up contributions, so 50% until the catch up is maxed out.

The match is spread out equally over the year and continues even if you max out before the end of the year.
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Old 12-04-2012, 08:59 PM   #14
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My former employer match was computed each pay period, so to do what you suggest would suboptimize the match. The way the match was structured encouraged you to spread your contributions over the year.
Of course! Not sure why I wasn't getting the "per month" concept until now. No way they would (or should) do the math based on my income on an annual basis when I'm only earning it bi-weekly, and could quit at any time. A book I once read said that whenever you hear "%" immediately follow that mentally with "of what?"

My plan does have a high limit on contributions, though. After the IRS limit one can contribute up to $49k on an after-tax basis, but not more than 100% of compensation. Not sure why I would contribute taxable money to the 401k when I could buy whatever I want in my brokerage account, but Mega Full Service Broker would love to get some of my money away from Vanguard or Schwab.


Thanks to all of you.
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Old 12-04-2012, 09:04 PM   #15
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....
Not sure why I would contribute taxable money to the 401k when I could buy whatever I want in my brokerage account, but Mega Full Service Broker would love to get some of my money away from Vanguard or Schwab.


Thanks to all of you.
Some plans allow employees to rollover after-tax contributions annually to Roth IRAs while they are still employed. Thus, these plans effectively allow large Roth IRAs contributions beyond the measly $5K - $6K annual limit.

If one cannot do such in-service rollovers of only the after-tax contributions, then it is probably unwise to make after-tax contributions.
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Old 12-04-2012, 09:34 PM   #16
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DW should be working only half the year next year. I'll max out the 401k during that time. Then we'll have to let it sit into 2014 until the employer match catchup contribution catches up with our contributions. I may be able to Roth convert a little out of my rollover IRA and stay within the 15% tax bracket (or whatever it is for 2013).

If you will be under the 15% tax bracket next year (watching out for qualified dividends as well), you will probably want to do a Roth conversion to fill in the difference.
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Old 12-05-2012, 11:28 AM   #17
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I did this a few years back... hit 401K contribution limit by end of March. Was nice to live poor for first few months and then get huge paychecks the rest of the year. It was fine from employer perspective but I think hurt me market-timing...
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Old 12-05-2012, 11:41 AM   #18
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Quote:
Originally Posted by GalaxyBoy View Post
I'm toying with the idea of deferring 100% (after mandatory deductions, like health insurance) to my 401(k)...

Anyone else do this? Are there implications I haven't thought of? For example, does it screw up tax withholding for the year?
Depends on your mix of taxable, IRA/401k, and Roth, and what your expected tax bracket is after FIRE...

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If I had a sugar momma to live with for a few months, I could do that...
While we're speaking of mythical figures, hows about a unicorn and a mermaid...
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Old 12-05-2012, 01:50 PM   #19
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The Big 401(k) Match Mistake - Forbes
FWIW...
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Old 12-05-2012, 02:04 PM   #20
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My employer allows up to 50%, so I put in about 33%, and hit my max in late November. Built in Xmas money!

Matching and market timing would be things to look out for.
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