Author Topic: Early in the year 401k maxout?  (Read 9651 times)

AlanStache

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Early in the year 401k maxout?
« on: November 26, 2014, 05:42:53 AM »
Got to talking with the accountant at work and he said that this year he maxed out his 401k early in the year as he expected the market to go up and wanted to capture those gains.  Is there a point to this strategy, provided you would invest in taxable accounts what was not put into the 401k early?  What I think he did; he maxed out the 401k by like April with very large withholding's then nothing was taken out the rest of the year.  I would assume he was investing in taxable accounts after April at a higher rate as he was taking home more. 

We do not loose any company match for the remainder of the year if we max out early; I hit the limit a few months back and have been getting +100$/pay period since into my account for the match.

I guess I can see a slight tax benefit to this but it would seem small.  Would this tax benefit compound or only help for one year?  Am I missing something else?

Cromacster

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Re: Early in the year 401k maxout?
« Reply #1 on: November 26, 2014, 06:09:35 AM »
This strategy is called Front Loading.

http://www.madfientist.com/front-loading/

Overall, I think this strategy has minimal benefit for tax purposes.  Your tax bill for the year ends up being the same.  You just don't pay much in taxes early in the year.  The main advantage you get is if there is an upswing in the market, you get to capture more of it.

You mentioned it won't matter for your company match, but for some peoples plans if they front loaded the entire 17,500/18,000 they would lose out on their match for the rest of the year.  If that's the case you need to plan for a buffer, ie front load 15,000, then spread the rest over the year to receive the company match.

AlanStache

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Re: Early in the year 401k maxout?
« Reply #2 on: November 26, 2014, 06:54:05 AM »
This strategy is called Front Loading.

http://www.madfientist.com/front-loading/

Overall, I think this strategy has minimal benefit for tax purposes.  Your tax bill for the year ends up being the same.  You just don't pay much in taxes early in the year.  The main advantage you get is if there is an upswing in the market, you get to capture more of it.

Thanks for the info and link.  Taxes: you are paying latter in the year rather than earlier in the year so there is some Time Value of Money things going on but yeah seems like a small benefit, but maybe I should do the numbers. 

So you can capture any gains in a tax advantaged account rather than a taxable account, but those are only due when you sell and that might be years down the line after much larger gains, but you still captured more of the market gain as you were buying earlier with untaxed dollars so you got more shares too (but then fewer latter on?). 

Dont think I will bother with this but good to know what is going on and see other options.

mustachianism_is_aredpill

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Re: Early in the year 401k maxout?
« Reply #3 on: November 26, 2014, 03:46:21 PM »
I did the same thing (maxed out 401k by May), and I believe I did capture some gains. I honestly didn't think about it that way till now though.

My thinking at the time was that I'd get an extra 7 months of compounding for the entire contribution, rather than spreading the $17.5k over 12 months. I figured getting 7 extra months' compounding every year over a 15-20 year career would make a significant difference. Is this line of thinking correct?


aschmidt2930

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Re: Early in the year 401k maxout?
« Reply #4 on: November 26, 2014, 03:49:13 PM »
I think it's a solid strategy. It may not work out next year, but if done for the next 10 years I would think one would see greater gains.

Druid

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Re: Early in the year 401k maxout?
« Reply #5 on: November 26, 2014, 03:57:37 PM »
I did the same thing (maxed out 401k by May), and I believe I did capture some gains. I honestly didn't think about it that way till now though.

My thinking at the time was that I'd get an extra 7 months of compounding for the entire contribution, rather than spreading the $17.5k over 12 months. I figured getting 7 extra months' compounding every year over a 15-20 year career would make a significant difference. Is this line of thinking correct?

Theoretically you would benefit more from compounding and dividend payments if you invested the 18k in the first half of the year as opposed to evenly throughout the year. However most people that can afford to put 18k away in the first half of the year should also be able to put away the after tax equivalent in the second half of the year in taxable accounts. So the compounding would be minimal and doesn't appear to be the incentive as much as paying less taxes earlier in the year. Unless you tend to consume a lot more in the second half of the year and not save for whatever reason.
« Last Edit: November 26, 2014, 04:01:40 PM by Druid »

rmendpara

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Re: Early in the year 401k maxout?
« Reply #6 on: November 26, 2014, 05:35:03 PM »
Very small benefit. You are just as likely to invest before the market goes up as you are to invest all 17.5k just as the market hits a top and crashes.

It's timing the market. So no, no sustainable benefit (over many years of employment).

Eric

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Re: Early in the year 401k maxout?
« Reply #7 on: November 26, 2014, 05:44:40 PM »
Very small benefit. You are just as likely to invest before the market goes up as you are to invest all 17.5k just as the market hits a top and crashes.

It's timing the market. So no, no sustainable benefit (over many years of employment).

I don't think it's timing the market at all.  Getting the maximum amount invested in the minimum amount of time no matter market performance (which is what front loading does) is pretty much the opposite of market timing.

Dodge

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Re: Early in the year 401k maxout?
« Reply #8 on: November 26, 2014, 06:06:51 PM »

Very small benefit. You are just as likely to invest before the market goes up as you are to invest all 17.5k just as the market hits a top and crashes.

It's timing the market. So no, no sustainable benefit (over many years of employment).

I don't think it's timing the market at all.  Getting the maximum amount invested in the minimum amount of time no matter market performance (which is what front loading does) is pretty much the opposite of market timing.

The person mentioned by the OP was definitely market timing, he performed the action with the thinking that the market will be going up soon. The general concept of front loading, however is not market timing. It's more like making a lump sum investment instead of dollar cost averaging.

Eric

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Re: Early in the year 401k maxout?
« Reply #9 on: November 26, 2014, 06:34:40 PM »
I read it more in the front loading mindset, that since the market goes up more often than not, (approx. 2 out of 3 years on average?) it's beneficial to be invested as early as possible.  If it was meant as a one time "this particular market is poised to go up because <insert random guess>", then yeah, I gotcha.

Daisy

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Re: Early in the year 401k maxout?
« Reply #10 on: November 26, 2014, 09:19:14 PM »
I'm going to do this next year. Frontload my 401k contributions and backload my income taxes. I suggested it in my thread titled "Frontloading and Backloading" as a way to smooth out the paychecks throughout the year. I get no benefit paying my income taxes evenly throughout the year, but there may be some benefit to frontloading the 401k. Plus, if you're laid off mid year you have stocked a bunch away in your 401k and don't have to wait for a tax refund the following April.

teen persuasion

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Re: Early in the year 401k maxout?
« Reply #11 on: November 27, 2014, 09:14:06 AM »
I'm going to do this next year. Frontload my 401k contributions and backload my income taxes. I suggested it in my thread titled "Frontloading and Backloading" as a way to smooth out the paychecks throughout the year. I get no benefit paying my income taxes evenly throughout the year, but there may be some benefit to frontloading the 401k. Plus, if you're laid off mid year you have stocked a bunch away in your 401k and don't have to wait for a tax refund the following April.

However, if you do change jobs mid year, and second employer has a better match, fully frontloading your first employer's 401k leaves you no space to contribute to second employer's 401k to capture that better match.  DH left one employer in June, and opted to leave ~$1500 of space to contribute to his next employer's 401k, since they had a >0 match.  It was a gamble, since the new job wasn't a sure thing, and didn't materialize until October.

Druid

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Re: Early in the year 401k maxout?
« Reply #12 on: November 27, 2014, 09:55:18 AM »
I'm going to do this next year. Frontload my 401k contributions and backload my income taxes. I suggested it in my thread titled "Frontloading and Backloading" as a way to smooth out the paychecks throughout the year. I get no benefit paying my income taxes evenly throughout the year, but there may be some benefit to frontloading the 401k. Plus, if you're laid off mid year you have stocked a bunch away in your 401k and don't have to wait for a tax refund the following April.

However, if you do change jobs mid year, and second employer has a better match, fully frontloading your first employer's 401k leaves you no space to contribute to second employer's 401k to capture that better match.  DH left one employer in June, and opted to leave ~$1500 of space to contribute to his next employer's 401k, since they had a >0 match.  It was a gamble, since the new job wasn't a sure thing, and didn't materialize until October.

I am pretty sure you can still contribute to 401k's beyond the 18k tax free portion, so the person in your scenario would be able to contribute to the new plan and receive matching, but it would not be tax deductible. Am I wrong here?

teen persuasion

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Re: Early in the year 401k maxout?
« Reply #13 on: November 27, 2014, 10:03:31 AM »
I'm going to do this next year. Frontload my 401k contributions and backload my income taxes. I suggested it in my thread titled "Frontloading and Backloading" as a way to smooth out the paychecks throughout the year. I get no benefit paying my income taxes evenly throughout the year, but there may be some benefit to frontloading the 401k. Plus, if you're laid off mid year you have stocked a bunch away in your 401k and don't have to wait for a tax refund the following April.

However, if you do change jobs mid year, and second employer has a better match, fully frontloading your first employer's 401k leaves you no space to contribute to second employer's 401k to capture that better match.  DH left one employer in June, and opted to leave ~$1500 of space to contribute to his next employer's 401k, since they had a >0 match.  It was a gamble, since the new job wasn't a sure thing, and didn't materialize until October.

I am pretty sure you can still contribute to 401k's beyond the 18k tax free portion, so the person in your scenario would be able to contribute to the new plan and receive matching, but it would not be tax deductible. Am I wrong here?

I think the new employer did not allow after tax contributions.

Westoftown

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Re: Early in the year 401k maxout?
« Reply #14 on: November 27, 2014, 11:12:43 PM »
Warning!!  Check your 401K plan carefully.   I went the route this year and its biting me.  Here's how.  I just maxed out my 401K contribution at $17.5K.   Our match is 4% if you contribute 5%.  You only get the 4% each pay period even if you contribute 20%.  However, they only match on pay periods when you contribute!   So now I have 2 months with NO MATCHING - because nothing is being taken out.   There is a thing called TrueUp where some companies look at your total contribution and then get you the extra money you are owed later - but our doesnt.

I am going to have to fight this with HR.   There is nothing in our policy manual that you have to contribute in equal installments to get the match - but thats what it amounts to.  I'll have to fight it - and not sure how that will play out.   

Just do the sure thing and contribute evenly throughout the year.

juuustin

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Re: Early in the year 401k maxout?
« Reply #15 on: November 28, 2014, 05:59:18 AM »
Warning!!  Check your 401K plan carefully.   I went the route this year and its biting me.  Here's how.  I just maxed out my 401K contribution at $17.5K.   Our match is 4% if you contribute 5%.  You only get the 4% each pay period even if you contribute 20%.  However, they only match on pay periods when you contribute!   So now I have 2 months with NO MATCHING - because nothing is being taken out.   There is a thing called TrueUp where some companies look at your total contribution and then get you the extra money you are owed later - but our doesnt.

I am going to have to fight this with HR.   There is nothing in our policy manual that you have to contribute in equal installments to get the match - but thats what it amounts to.  I'll have to fight it - and not sure how that will play out.   

Just do the sure thing and contribute evenly throughout the year.

Are you sure there is nothing in writing saying you have to contribute every pay period to get the match? I ask because the Federal TSP match very clearly states that you only receive the match for pay periods that you contribute the require amount of funds.  Our HR even goes so far as to send out an e-mail in late November advising everyone of the exact dollar amount they need to contribute every week to hit the max without losing any match.  Specifically in this e-mail they reference the situation you are currently in, where someone contributes too much to start and doesn't have "space" left to contribute to get the match.

With that said, however, for any Feds looking to front load, you can just run a spreadsheet comparing your salary to the base contribution you'd need to make bi-weekly to get the match, and then front load the difference as you see fit.

hdatontodo

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Re: Early in the year 401k maxout?
« Reply #16 on: November 28, 2014, 06:03:15 AM »
I maxed out on 401k and Soc Sec by October and am using the extra bring home to make extra principal payments since I am working to pay off the house before I stop working.

I'm also not bashful about putting in some overtime since I bring home a higher percentage of it before 12/31.
« Last Edit: November 28, 2014, 07:37:47 AM by hdatontodo »

Workinghard

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Re: Early in the year 401k maxout?
« Reply #17 on: November 28, 2014, 06:52:20 AM »
We're planning on front loading my husband's 401(k) in 2016. He will retire that year after he maxes it out. It will also be good practice for living on my income and may be a deciding factor if he goes PRN until the end of the year. He would not have to, but it would delay potential withdrawals. Course at that point I could stop my 401(k) contributions if needed or more likely our after-tax contributions

NinetyFour

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Re: Early in the year 401k maxout?
« Reply #18 on: November 28, 2014, 07:24:00 AM »
I cannot frontload my 401a.  With every paycheck, my employer contributes 11.4% of my salary and I contribute 8% of it.  These percentages are fixed. 

However, I can also contribute $24,000 (I'm old) to my 403b, and I plan to frontload it in 2015.

Westoftown

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Re: Early in the year 401k maxout?
« Reply #19 on: November 29, 2014, 06:59:17 AM »
Warning!!  Check your 401K plan carefully.   I went the route this year and its biting me.  Here's how.  I just maxed out my 401K contribution at $17.5K.   Our match is 4% if you contribute 5%.  You only get the 4% each pay period even if you contribute 20%.  However, they only match on pay periods when you contribute!   So now I have 2 months with NO MATCHING - because nothing is being taken out.   There is a thing called TrueUp where some companies look at your total contribution and then get you the extra money you are owed later - but our doesnt.

I am going to have to fight this with HR.   There is nothing in our policy manual that you have to contribute in equal installments to get the match - but thats what it amounts to.  I'll have to fight it - and not sure how that will play out.   

Just do the sure thing and contribute evenly throughout the year.

Are you sure there is nothing in writing saying you have to contribute every pay period to get the match? I ask because the Federal TSP match very clearly states that you only receive the match for pay periods that you contribute the require amount of funds.  Our HR even goes so far as to send out an e-mail in late November advising everyone of the exact dollar amount they need to contribute every week to hit the max without losing any match.  Specifically in this e-mail they reference the situation you are currently in, where someone contributes too much to start and doesn't have "space" left to contribute to get the match.

With that said, however, for any Feds looking to front load, you can just run a spreadsheet comparing your salary to the base contribution you'd need to make bi-weekly to get the match, and then front load the difference as you see fit.
Warning!!  Check your 401K plan carefully.   I went the route this year and its biting me.  Here's how.  I just maxed out my 401K contribution at $17.5K.   Our match is 4% if you contribute 5%.  You only get the 4% each pay period even if you contribute 20%.  However, they only match on pay periods when you contribute!   So now I have 2 months with NO MATCHING - because nothing is being taken out.   There is a thing called TrueUp where some companies look at your total contribution and then get you the extra money you are owed later - but our doesnt.

I am going to have to fight this with HR.   There is nothing in our policy manual that you have to contribute in equal installments to get the match - but thats what it amounts to.  I'll have to fight it - and not sure how that will play out.   

Just do the sure thing and contribute evenly throughout the year.

Are you sure there is nothing in writing saying you have to contribute every pay period to get the match? I ask because the Federal TSP match very clearly states that you only receive the match for pay periods that you contribute the require amount of funds.  Our HR even goes so far as to send out an e-mail in late November advising everyone of the exact dollar amount they need to contribute every week to hit the max without losing any match.  Specifically in this e-mail they reference the situation you are currently in, where someone contributes too much to start and doesn't have "space" left to contribute to get the match.

With that said, however, for any Feds looking to front load, you can just run a spreadsheet comparing your salary to the base contribution you'd need to make bi-weekly to get the match, and then front load the difference as you see fit.

Nope, our sure doesn't - not that I've ever been made aware.  I checked our policy guide.  Now, we are a small company so thats probably why.

nottoolatetostart

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Re: Early in the year 401k maxout?
« Reply #20 on: December 01, 2014, 08:27:44 AM »
We front load mainly from a tax perspective of if one of us is laid off, it at least shelters some of our income for that year. Plus, it's a way to "cross" it off the list in terms of financial annual housekeeping goals.

Note we both front load the first 13-14K and then I figure out the minimum % needed for the rest of the year to ensure we get max of employer contributions. Don't want to leave free money on the table! 

rmendpara

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Re: Early in the year 401k maxout?
« Reply #21 on: December 01, 2014, 09:10:17 AM »
I read it more in the front loading mindset, that since the market goes up more often than not, (approx. 2 out of 3 years on average?) it's beneficial to be invested as early as possible.  If it was meant as a one time "this particular market is poised to go up because <insert random guess>", then yeah, I gotcha.

Maybe I read it differently with poster said this: "Got to talking with the accountant at work and he said that this year he maxed out his 401k early in the year as he expected the market to go up and wanted to capture those gains."

You are correct and I fully agree that lump sum investing beats averaging in, assuming you have a lump sum available or the liquidity to delay income.

seattlecyclone

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Re: Early in the year 401k maxout?
« Reply #22 on: December 01, 2014, 12:36:14 PM »
I always expect the market to go up. I realize that it often doesn't in the short term, but I wouldn't be investing if I expected my investment to go down in value before I needed to liquidate it!

Given that I expect the market to go up more often than not, front loading the 401(k) contributions makes sense because I get to capture more of the growth in the tax-deferred account and less of the growth in the taxable account. It won't make a huge difference even if the market goes up a lot, but every little bit helps.

If your 401(k) plan is structured so that you only get the full match if you're contributing a certain amount every paycheck, make sure you do that. The benefit of getting the matching funds will greatly outweigh the benefit of sheltering a little bit more of the gains through front-loading.

Beric01

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Re: Early in the year 401k maxout?
« Reply #23 on: December 01, 2014, 01:11:51 PM »
I do this. I can max out my 401(k) in 3-4 months. My company stops contributions when I max out, but at the end of the year they have a "true match" which catches me up with any employer contributions I might have missed earlier in the year. I guess the most optimal way would be to max it out except for the amount I need to get my 3% match each month, but I think that's quibbling over pennies. The point is that contributing to my 401(k) early lets me put in more money in the market than otherwise, due to the tax reduction.

AlanStache

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Re: Early in the year 401k maxout?
« Reply #24 on: December 01, 2014, 05:45:00 PM »
I read it more in the front loading mindset, that since the market goes up more often than not, (approx. 2 out of 3 years on average?) it's beneficial to be invested as early as possible.  If it was meant as a one time "this particular market is poised to go up because <insert random guess>", then yeah, I gotcha.

Maybe I read it differently with poster said this: "Got to talking with the accountant at work and he said that this year he maxed out his 401k early in the year as he expected the market to go up and wanted to capture those gains."

You are correct and I fully agree that lump sum investing beats averaging in, assuming you have a lump sum available or the liquidity to delay income.

I heard the accountant as saying that he expected extra market gains in early '14 above the normal 7-8%/year.  This did not occur to me to specify vs normal market gains. 

I think I will have some 'life events' early next year that would make front loading not a great idea for me, but is something to consider in years down the line.