Maxing out your 401k

[aaronc879]

Does anyone max out their 401k well before the end of the year or does everyone do dollar-cost averaging. Wouldn't it be better to get your money in there as soon as possible. How about your roth ira. Lump sum or equal monthy contributions? Seems like you can save a lot in fees by making a lump sum at the beginning of the year for your ira.

 

[Sheryl]

I time my contributions over 20 pay periods, ten months. That way I have bigger pay checks over the holidays in Nov. and Dec.

 

[aaronc879]

How does that work with your company match? If you don't contribute anything for two months, because your maxed out, does that mean you lose out on the match?

 

[Nords]

How does that work with your company match? If you don't contribute anything for two months, because your maxed out,  does that mean you lose out on the match?

I've never contributed to a 401(k) but I've read some books and talked to a CPA about it.

The match is usually worth far more than the "loss" of having to DCA instead of lump sum.

You could always make a huge lump sum early in the year and continue to DCA the rest of the year.

 

[REWahoo]

How does that work with your company match? If you don't contribute anything for two months, because your maxed out, does that mean you lose out on the match?

Shouldn't have any impact on the amount of match, but it could have a positive effect on your 401(k) return.

Example: My company matched $0.50 for every $1.00 I contributed up to 3% of my annual salary. The matching contribution was made each month and stopped whenever I hit the 3% cap. The sooner I got there the sooner both contributions were invested and (hopefully) earning a return for my 401(k).

Some plans may not pony up the match until the end of the year, but it would still be to your advantage to get your contributions into the 401(k) and working for you as soon as you can.

OTOH, how quickly the money withheld from your paycheck is deposited into your 401(k) account is another matter entirely. Surely a corporation wouldn't hold these funds for a while and earn a little interest on them before they show up in your account...or would they? :

 

[Craig]

Ours, and I believe most, match based upon when the employee makes their own contributions.

Another factor ... you don't know if you'll be there all year or not.  I'm a CFO, and the average tenure for CFO's is 28 months.  CFO's tend to take their employee benefits when we can get them ... never know when you'll be on the bench again. 

I usually fully fund mine from bonus checks (when we have good years) ... that way, I"m sure it is in, and working.  The old "pay yourself first". And, when you're over 50, you get an extra $5K added to your limit.

 

[Alex]

I make a lump sum contribution to our IRA's at the beginning of the year. On my 401K I do not have the option of contributing a lump sum.

 

[free4now]

Ours, and I believe most, match based upon when the employee makes their own contributions.

My former employer would make up matches at the end of the year if I maxed out earlier. Example: Mine matched up to 6% of salary per pay period, but if I contributed 15% every period as I did, the company would continue putting 6% per month into the 401k until the end of the year even after my contribution limit was reached. This policy was the source of endless lunchtime "Really? You sure?" discussions.

Another factor ... you don't know if you'll be there all year or not. 

Since I left my company early in the year I was glad to have maxed the 401k.

As an aside, another benefit of leaving in the middle of the year is that I could use my full year's HCRA (HealthCare Reimbursement Account) value even though I had made less than a year's contributions. Example: I contribute $166 per month to my HCRA (for a total of $2000/yr), and even though I left at the end of Februrary I still could (and did) spend the full $2000 for that year. Even though I only made 3x$166=$500 in contributions. It's literally free money. If I had been sure I would leave early in the year I would have contributed the max $4000/yr to my HCRA. The reason the plan can afford to do this is that it's more than made up by all the money people forfeit by not fully using their contributions.

 

[Papi]

I max-out my 401k as much and as early as possible.  My last contribution is usually in July.  I have been doing this for probably the last 15 years.  My problem is that since I work for a small-ish firm, and MANY of the younger (and even some older workers) do not contribute much to the 401k, I get penalized under the 401k rules and I have to "return" some of my contributions, usally the following year in Februrary or March.  At least I can get about 8 months of possible appreciation on money I have to return 

I have written my congressmen a couple of time about how sucky that rule is, that I get penalized just by the fact that I work for a small firm (and my SOB peers don't contribute enough!!).  If I worked for a large company, this wouldn't be a problem.  My congressmen usually sends me a return message sympathizing with my situation, and then asks for a re-election donation 

 

[LOL!]

Contrary to REWahoo!'s post, my spouse's 401(k) has a match mechanism such that it is best to contribute each paycheck.  The way it works is that they match up to 3% of your paycheck as long as your contribute.  So if you make $60K a year and put in $20K in the first 6 months, you would get a $900 match (3% of your $30K).  Since you would not be able to contribute any more after those 6 months, you would not get anymore employer match.  However, if you put $20K in over the course of 12 months you would get a $1800 match.

For my 401(k) I usually reach my contribution limit in May or June.  This is great in those years where the stock market goes up from June to December.  It is not so great in those years where the stock market goes down from June to December (think 2000, 2001, 2002).

And for aaronc879: your IRA should not be charging you fees anyways, so you shouldn't save any money on fees by making a lump sum at the beginning of the year versus DCA over the course of the year.

 

[Dude]

How does that work with your company match? If you don't contribute anything for two months, because your maxed out,  does that mean you lose out on the match?

Yes, at least that is how it works at my employer, i.e. if I don't make a 401k contribution during a pay period, my employer does not make a contribution.  However, the contribution can be either pre-tax of after-tax dollars, so for example if I contribute the max pre-tax contribution of $15k before the end of the year, I could start making after-tax contributions so that I could continue to receive the emplayer match.  Hope that helps.

 

[hogwild]

My former employer would make up matches at the end of the year if I maxed out earlier.   Example: Mine matched up to 6% of salary per pay period, but if I contributed 15% every period as I did, the company would continue putting 6% per month into the 401k until the end of the year even after my contribution limit was reached. 

That is the way it works at my company as well.

 

[aaronc879]

And for aaronc879: your IRA should not be charging you fees anyways, so you shouldn't save any money on fees by making a lump sum at the beginning of the year versus DCA over the course of the year.

When I said fees, I was talking about commisions and transaction fees. Don't you spend more on those if you make 12 contributions of $333.33 per year instead of one at $4000. Is it worth those fees/expenses to DCA.

 

[saluki9]

I make 100% of my 401(k) contribution in the first couple pay periods of each year.

It does not affect my match at all.

 

[LOL!]

When I said fees, I was talking about commisions and transaction fees. Don't you spend more on those if you make 12 contributions of $333.33 per year instead of one at $4000. Is it worth those fees/expenses to DCA.

Aren't you using a transaction/commission-free, no-load mutual fund for your IRA?  If not, why not?

You are right though if you are using a broker that charges you those fees.

 

[Martha]

When I was in management in our business of about 75 employees, we converted to a safe harbor 401k plan. We do not provide a "match" but contribute through our 401k/profit sharing plan a minimum of 3% of an employee's wages and going up to a high of 14.5% depending on age and length of service for non-lawyer employees. This enables us to put up to 14.5% pretax in the shareholder's pockets so most shareholder's can max out the plan. Which, if you are 50 and over, is $49,000 for 2006 and $44,000 if you are less than 50.

We don't pay the contribution until year end because it is a profit sharing contribution and we could decide to forgo or reduce the contributions. We never have made less than the maximum. The money doesn't actually hit employee accounts until early February because of the plan testing we have to do.

Employee voluntary contributions are sent to the plan immediately when made.

Before I went part time I tended to front load my voluntary contributions early in the year. Now I do the reverse.

 

[Craig]

One other point ... the best answer re: the matching requirements is to get and read your SPD ... summary plan description. Your company must give it to you. If it does not explain the match mechanics completely, then ask for for a copy of the full plan document.

Having managed a few of these, and seeing the dismal job some third party administrators can do, I assure you that folks can and do make mistakes with some of these calculations. The folks on this forum are much more conversant with the principles involved, compared to the administrators' staff I've worked with on 401k's. Check their calculations, and make sure they're doing it right. Frankly, we've appreciated it when our associates have told us there is an issue ... if the third party administrator, our Controller and our auditors are telling me everything is cool, our management can't know something is amiss until one of our employees points out the problems they see in their own accounts.

Best of luck.

 

[73ss454]

When I was in management in our business of about 75 employees, we converted to a safe harbor 401k plan.  We do not provide a "match" but contribute through our 401k/profit sharing plan a minimum of 3% of an employee's wages and going up to a high of 14.5% depending on age and length of service for non-lawyer employees.  This enables us to put up to 14.5% pretax in the shareholder's pockets so most shareholder's can max out the plan.  Which, if you are 50 and over, is $49,000 for 2006 and $44,000 if you are less than 50.

We don't pay the contribution until year end because it is a profit sharing contribution and we could decide to forgo or reduce the contributions.  We never have made less than the maximum.  The money doesn't actually hit employee accounts until early February because of the plan testing we have to do.

Employee voluntary contributions are sent to the plan immediately when made.

Before I went part time I tended to front load my voluntary contributions early in the year.  Now I do the reverse.

Martha,

Out of the 75 employees how many are maxing out at the 44K or 49K for over 50?

 

[WRBT]

Just five years ago my wife's pension contribution was about 5%. Then it went up to about 7.5%, and now they've announced it's going up again to 9.1%.

If you're planning on retiring this is bad news, because you're getting the same benefit but paying a lot more for it. However, if you're planning on getting nowhere near your 80 points and pulling out lump sum your pension, it's outstanding news... they match 100% (10 years to full vest) and give a solid guaranteed interest rate.

This is like a 401k on steroids now, and it's funny that everyone at her work is moaning while we're popping champagne.

 

[Martha]

Martha,

Out of the 75 employees how many are maxing out at the 44K or 49K for over 50?

About 12.

 

[73ss454]

That's a pretty good #, I would have thought it was less.

Are you running classes at the Firm?

 

[Sheryl]

When I was in management in our business of about 75 employees, we converted to a safe harbor 401k plan.  We do not provide a "match" but contribute through our 401k/profit sharing plan a minimum of 3% of an employee's wages and going up to a high of 14.5% depending on age and length of service for non-lawyer employees.  This enables us to put up to 14.5% pretax in the shareholder's pockets so most shareholder's can max out the plan.  Which, if you are 50 and over, is $49,000 for 2006 and $44,000 if you are less than 50.

We don't pay the contribution until year end because it is a profit sharing contribution and we could decide to forgo or reduce the contributions.  We never have made less than the maximum.  The money doesn't actually hit employee accounts until early February because of the plan testing we have to do.

We also have the safe harbor plan, but we make the 3% minimum profit sharing contribution to the employees each month rather than waiting until the end of the year.

 

[Andre1969]

I think I put about $13,500 into my 401k last year. My company puts in 3% of my pay, whether I contribute or not.

This year I have it set up so that they take out 30% of my pay each period. And in theory, that should put me right at the $15,000 contribution limit for the year, as I currently make $50K per year. However, any overtime and my mid-year pittance raise is going to throw that off. Once I hit that $15K limit though, the company simply stops taking it out of my paycheck. However, they'll keep investing their 3% per paycheck, as the company contribution doesn't count toward your federal limit.

 

[justin]

I get a company match on my 401k contributions, up to 4% of each pay check. I also max out contributions each year. As a result, I have to time my bi-monthly contributions so that I reach the $15000 limit on the dec 31 paycheck, or I leave matching money on the table. As a result, I usually adjust my withholding percentage downward when I get a raise or bonus so that my last contribution on dec 31 paycheck is at least 4% of my paycheck. Then Jan 1 I readjust my withholding percentage so I'll get back to using up the IRS limit by Dec 31 again. I talked with HR about a better way to handle this and they couldn't come up with anything. They also couldn't comprehend where all the money was coming from to make a full $15000 contribution. :

Making my contributions approximately equal throughout the year also helps with budgeting and cash flow issues. My paychecks are usually about the same amount each month.