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401K Maxout
Old 10-30-2015, 01:08 PM   #1
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401K Maxout

My boss was so proud, he told me yesterday that he just maxed out his 401k for the year. Last year was the first year he had maxed it out and he bumped up his contribution this year. Now he was looking for what he should do with the "extra" money for the rest of the year (but that's a different story).

After congratulating him, I told him he was leaving money on the table by maxing out so soon. This is because our company match is determined by the percent of our paycheck, and not a percent of our year end pay. The ideal situation is to max out the 401k on the last pay period. He had a very hard time grasping this idea. I had to whip up a quick spreadsheet to show him. If I maxed out in October, I'd be missing out on about $2000 of match money

A second co-worker overheard our conversation. He was unaware of this anomaly as well. So, thought I'd share this story here in case anyone else is in the same situation.
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Old 10-30-2015, 01:14 PM   #2
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Correct!

Some companies provide a "true-up" to fix this. Problem is, the true-up is usually issued the following spring, so you are essentially missing the money for 5 months or so.

Also, if you quit/retire/get laid off, you may miss the true up completely.

It is on my list of things to do next year to better match my 401k contributions to come closer to the end of year.
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Old 10-30-2015, 01:19 PM   #3
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My former employer did the the true-up thing, too. Indeed, I just received a true-up contribution this month into my old 401(k) which I had already transferred to another financial institution. And I haven't been employed for 17 months!

So even if an employer does the true-up thing, it can takes months and months for it to be processed.

Now I have to make another transfer to get this money into the right place. It's a headache that I do not mind as the money will pay for lots of pain pills.
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Old 10-30-2015, 01:20 PM   #4
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Our company's plan allows for post-tax contributions to our 401(k) plan. What I don't know is if the company match can be applied against post-tax contributions, figuring it would still be a pre-tax match.
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Old 10-30-2015, 01:26 PM   #5
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Our company's plan allows for post-tax contributions to our 401(k) plan. What I don't know is if the company match can be applied against post-tax contributions, figuring it would still be a pre-tax match.
Yes, Roth 401K contributions are always matched with traditional (pre-tax) 401K dollars, as far as I know.
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Old 10-30-2015, 01:31 PM   #6
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Note that some "post-tax 401(k) plans" are NOT Roth 401(k) plans, but are more like non-deductible traditional IRAs. Unless the money can be rollovered or transferred almost immediately into a Roth IRA, then I would not make a post-tax contribution. The reason is that gains become taxed at ordinary income tax rates upon withdrawal instead of the more favorable Roth withdrawal rate of 0% or the more favorable long-term capital gains tax rate of 0% to 20% of a taxable investing account.
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Old 10-30-2015, 04:12 PM   #7
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Note that some "post-tax 401(k) plans" are NOT Roth 401(k) plans, but are more like non-deductible traditional IRAs. Unless the money can be rollovered or transferred almost immediately into a Roth IRA, then I would not make a post-tax contribution.
You might look up mega-backdoor Roth. If the plan has the right combination of policies, these after-tax rules can allow you to put the full employee plus employer 50+k into the plan then roll it over selectively into a Roth.
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Old 10-30-2015, 04:14 PM   #8
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Yep, a mega-backdoor Roth fulfills my stated requirement.
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Old 10-30-2015, 04:42 PM   #9
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Where I used to work we had before tax 401k, after tax 401k, and Roth 401k. When the before tax was maxed out it would continue in the after tax up to about 52k.
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Old 10-30-2015, 05:01 PM   #10
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My former Megacorp did the true-up as well. If you maxed-out before year-end, the payroll system knew that. So they would continue to make matching contributions at the stipulated % of pay, even without an employee contribution.
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Old 10-30-2015, 08:54 PM   #11
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We have the same situation at our company. They match 50% up to 10%. If you put in 15% and max out early, you don't get the full benefit. Of course, this is a first world problem because in order to max out at the maximum percentage they let you put in, you have to make pretty good money.

To the OP - run your spread sheet out a little differently. If your company is like mine, you will find that if you make a larger sum of money, it doesn't matter. In my case, if you max out by paying in at 10% then it doesn't matter if you max out early. You still get the full employer benefit. I realized once in talking to my friends at work that I basically told them what I made when I said it didn't matter to me when I maxed out.
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Old 10-31-2015, 12:21 AM   #12
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Megacorp I'm with takes a lazier route and keeps the employer match rolling all year - even after employee contributions hit cap - as long as your elected employee contribution % remains above zero. For my mega, it currently matches 50% of the first 6% and even after I capped 18k their match keeps trickling in. If I were to adjust my employee contribution % down to zero, even after hitting the 18k cap which ostensibly should have no impact, I'd lose the company match.

Next year they are changing generously to a full 50% match with no "of the first 6%" clause. This means when I cap early, they will cap too... no more trickle getting me DCA through Oct - Dec, but instead much more, in earlier.

+1 on the post-tax, non-Roth "mega backdoor Roth" route. Smoke em if you've got em
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Old 10-31-2015, 09:30 AM   #13
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You really have to read your plan docs to figure out the specifics. At my micro-corp we get our entire company match and profit sharing for the previous fiscal year on May 1, so for us it doesn't matter when the contributions are made. If you work at the company on Sept 30, you'll get a contribution on the next May 1.
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Old 10-31-2015, 09:37 AM   #14
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My former Megacorp did the true-up as well. If you maxed-out before year-end, the payroll system knew that. So they would continue to make matching contributions at the stipulated % of pay, even without an employee contribution.
That was the same with our company. Made it easy to opt for our max of 20% per paycheck knowing that when the annual max was reached that the company match of 2.5% continued through the end of the year.
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Old 10-31-2015, 09:44 AM   #15
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Ours did not true up so I had to manage my 401k contributions to occur over the year to optimize the match.

OP, perhaps your boss should see if your plan matches after-tax 401k contributions to not miss out on that $2,000 he is leaving on the table.
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401K Maxout
Old 10-31-2015, 10:27 AM   #16
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401K Maxout

when they implemented at my company, i figured this out very quickly and caused a major public scene because our "company values" listed integrity, and this didn't fall in line. Was fixed very quickly. I quit a year later, practically fired.

I received many private thank yousfrom staff, many.

Sent from my iPhone using Early Retirement Forum
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