maximizing 401k employer contribs, or not

[growerVon]

Before I started thinking about min-maxing my investing, I didn't think about employer matching at the megacorp I'm at. I dialed up my contrib % as much as I could and knew I would get the half-percent employer match for each employee percent, capped at 3%-for-6%.

Over a decade later, I'm beginning to wake up and worried that I was leaving money on the table because at 15% I would hit the annual employee pre-tax limit earlier and earlier, leaving months where I'm not contributing... and not getting matched? My megacorp plan doesn't do anything awesome like flip your contrib amounts to post-tax upon hitting annual cap, or even highlight & suggest doing something so prudent. Instead DW and I would enjoy this initially holiday-timed paycheck "windfall" in true consumer fashion - both of us, in fact, as we both work at same megacorp. But from some of the lit I'd started to read, I worried the employer contribs were true matches, in the sense that if we capped early, we'd also end the employer contribs early. Semi-elaborate modeling ensues to calc the perfect employee contrib percentage, including estimated bonuses... DCA goodness... all set to change our elections soon.

Last night perusing the 401k account, salving the recent losses with yesterday's gains, and I notice megacorp has been making its contribs all along, well after my now-Sept capping. I'm feeling Huh?! and Awesome! at the same time. Reply back from the benefits folks confirms this is by design.

I still want us to reshape our per paycheck 401k contribs and ideally double-down & add in some post-tax, but it's great to settle my concern about the employer matching. I continue to be surprised and delighted at the depth of complexity available in the world of personal investing The More You Know...

 

[ChiliPepr]

The employer match would be spread out over the year no matter how fast you put yout money in. In your example, let's say you made $100k, so if you put $6k into your 401k, they would put in $3k. If you contributed $6k of your salary into the the 401k in January and then stopped. The company contribute $250 to you 401k in January and another $250 every month of the year to make up their $3k. I am pretty sure this also means that if you left the firm on Feb 1, the firm would stop contributing and they would only have match $250. (not positive on that last point)

 

[pb4uski]

At my employer, the match was 50% of the first 6% each pay period, so in order to optimize the employer match, I had to fashion my contributions so I had at least 6% withheld each pay period. IOW, if I had 0% withheld in a pay period I lost out on the match for that pay period.

Since these were the days before you could NOT roll any post-tax 401k monies into a Roth, each September after I got my bonus I had to adjust my withholdings so I maxed out my pre-tax 401k by the end of the year.

With the change now allowing post-tax 401k money to be rolled into Roth, I would have just set my % at something over 6% to optimize the match, maxed out the 401k and saved more in my post-tax 401k so it would have been easier to plan my 401k contributions and the annual adjustment caused by my bonus would have been a moot issue.

 

[ChiliPepr]

At my employer, the match was 50% of the first 6% each pay period, so in order to optimize the employer match, I had to fashion my contributions so I had at least 6% withheld each pay period. IOW, if I had 0% withheld in a pay period I lost out on the match for that pay period.

My current firm and previous firm had two different way of handling this situation...

My current firm will continue matching each pay period up to the limit. In other words, if they matched 50% of 6k, and I finished my 6k in June and stopped contributing, they would still contribute their portion each pay period until they got to 3K.

My previous firm, would not contribute July thru December, but would then contribute a lump sum at year end to catch up.

 

[growing_older]

At my employer, the match was 50% of the first 6% each pay period, so in order to optimize the employer match, I had to fashion my contributions so I had at least 6% withheld each pay period. IOW, if I had 0% withheld in a pay period I lost out on the match for that pay period.

At every place I worked who had a match, this is how they calculated. My first 401k had no match, so I used to contribute a larger percentage and enjoyed the larger paycheck after I reached the annual limit. I now have to recalculate each year as limits change and each summer after merit (cost of living) raises to make sure I contribute each pay period to get the match.

I know friends where the company will true up in Dec or Jan to adjust their match in case you contributed the requisite percentage but missed some pay periods. If I were fortunate enough to have such a plan I would probably go back to my higher percentage contributions. I really enjoyed the feeling of reaching my annual limit early, but with a match that depends on it I cannot do that anymore.

 

[Big_Hitter]

They only reason they do that is that it's much easier for the payroll/401k vendors to process, unless of course that limit is specified in the plan document.


There is nothing in the law or regs that say a frontloaded 402g max contribution ($17.5K in 2014) can't receive the maximum possible employer match.

 

[pb4uski]

I agree. It makes sense to do it that way because it is easier for the employer, particularly with employees joining and leaving all the time.

 

[gauss]

OP,
If you have the ability to contribute after-tax contributions to your (traditional) 401k (not to be confused with Roth 401k) AND your plan allows in-service withdrawals, then you have an opportunity to move over $50,000 per year to your Roth IRA. If you spouse works at the same Meacorp, then this would be over $100,00. No employer match is required to do this.

This can be a very useful benefit if you have access to it.

-gauss

 

[Jackanory]

At the end of last year I set my deductions for 401K and 401K catch-up to 100% for 2014, so that when I retired Jan 3rd, much of my PTO balance would go into pretax savings. 3% of my total 'income' for January was dutifully paid by my company as their matching contribution, even though for that 3 day period my income probably exceeded the CEO's!

 

[Senator]

My company matches once per year. In late January for the year prior. I just set my deduction for 75% and let it max out early.

It used to be you had to be working at the company on 12/31 to get the match. If you left mid-year, they did not match.

 

[growerVon]

Thanks for all the replies. It sounds like the employer matching policies vary and are employer-specific within a handful of patterns. I posed a follow-up scenario to my benefits contacts: what-if after capping on employee contributions I subsequently dialed down to zero - would they also drop? Based on what I'm seeing and others mention above, I believe they will drop to zero. For my megacorp, I think they simply base it on my salary that pay period, my rate (and thus their matching rate), and whether they've hit the annual employer contrib limit ($7800?)... which is what pb4, growing and bighitter said. Amusingly, benefits said they needed to route my query to a business analyst or something.

OP,
If you have the ability to contribute after-tax contributions to your (traditional) 401k (not to be confused with Roth 401k) AND your plan allows in-service withdrawals, then you have an opportunity to move over $50,000 per year to your Roth IRA. If you spouse works at the same Meacorp, then this would be over $100,00. No employer match is required to do this.

This can be a very useful benefit if you have access to it.

-gauss

Yes, we do have access to such a benefit. I've been sending more to post-tax taxable investing via a plain Vanguard acct instead of this, using the rationale of I'd like access to ER money before 59.5 (55 if retire there) but there is 72t/SEPP to access retirement funds early. Our plan allows both pre-tax 401k, post-tax 401k, and a Roth 401k. I haven't wrapped my head around these yet to figure out which is the best course. Any suggestions, in terms of contribution priorities? Should it be:

1. Pre-tax 401k maxed (DW and I are in a very high tax bracket MFJ)
2. Post-tax 401k with the intent to move to Roth IRA
3. Post-tax Roth 401k
4. Individual post-tax, taxable investing via Vanguard

We're currently doing 1 and 4. Guess I'm just confused about dryer sheets!

 

[Sunset]

At my employer, the match was 50% of the first 6% each pay period, so in order to optimize the employer match, I had to fashion my contributions so I had at least 6% withheld each pay period. IOW, if I had 0% withheld in a pay period I lost out on the match for that pay period.....

Mine was like this plus they did the actual match as a lump sum at the end of the year.
If you were not working there by the end of the year, there was no match

Needless to say, most folks who quit did it in January.

 

[growerVon]

OP,
If you have the ability to contribute after-tax contributions to your (traditional) 401k (not to be confused with Roth 401k) AND your plan allows in-service withdrawals, then you have an opportunity to move over $50,000 per year to your Roth IRA. If you spouse works at the same Meacorp, then this would be over $100,00. No employer match is required to do this.

This can be a very useful benefit if you have access to it.

-gauss

This is an overdue follow-up to Gauss' comment. Turns out the megacorp I'm with does have this option, which is also (I've learned) referred to as the Mega Backdoor Roth IRA. Thank you for suggesting this, Gauss! After reading up on this plan feature, I've been evangelizing it across my team at megacorp.

Have started leveraging this to a small degree, as other savings streams are dialed up pretty high currently. Looking forward to building up enough to get into a Vanguard fund ($3k entry amount). You could say I'm waiting on the steps of the Mega Backdoor Roth IRA. Should hit that around Oct when pre-tax hits its max and I can dial up the post-tax non-Roth 401k contributions commensurately. Megacorp's plan allows for unlimited in-service withdrawals of this contribution category, so once I have the $3k initial fund purchase I can trickle-in each pay period's contribution. Until then I have the post-tax non-Roth contributions going into the 401k's money market fund to avoid gains that will be taxable upon conversion. DW and I are in the 36% bracket.

 

[NgineER]

Until then I have the post-tax non-Roth contributions going into the 401k's money market fund to avoid gains that will be taxable upon conversion. DW and I are in the 36% bracket.

As long as you track your contribution dollars, you can transfer only that amount. My 401k provider spells out how much taxes to expect.

On my first rollover, I had 5% gains, so I only transferred the contribution amount. The second time, I had a 7% loss, and transferred everything, including the the first 5% gains without being taxed.