401K Scenario Question(Maxing it out early)

[401Killer]

Got into a discussion with some co-workers yesterday. I mentioned that my plan was paying my house off next year, and then maxing out my 401K percentage to 75%. This would allow me to max out the $18k early and get the obvious benefits of compounding interest with it maxed out early.

The interesting question came up that, lets say I max out my $18k, 6 months into the year. After that I will not technically be contributing anymore. Because of that, we questioned whether or not the company would continue to match it's 5%(total of 8%, 3% auto match) even though I would not be contributing anymore for the rest of the year?

So, would the company continue to match, or not match after you make the $18k limit? If they would stop after you maxed out, you would lose 5% match for the remaining 6 months of the year.

 

[MrMoogle]

Probably not, but it depends on the company.  You'd have to read your 401k forms or ask HR to find out.  In my last job, I got to $15k asap, then trickled in the remainder of the year.  Then spiked it up the last 2 paychecks to make sure I max it out.

[ketchup]

It depend on your company's policy.  Ask whoever's in charge of your 401k in the office.  I bet nobody else has ever brought it up. :)

[Patrick A]

Your workplace should continue to contribute and you should get your full match.   I've seen it done both ways, and HR can sometimes be genuinely confused about how it works . . . but no matter how they do it, you should get your match.  Just keep politely inquiring and pushing and they will figure it out.

[FIPurpose]

Every company does it differently. Mine was doing it on a quarter by quarter basis with Q1 beginning in Nov. each year. So this year I decided to max it out after August (Beginning of Q3) that way my Q1 match is still completely met in January. Well wouldn't you know that this month I got a letter stating that the 401k match policy was changing beginning in January requiring that the match will be calculated as up to a 4% match for each pay period (meaning it has to be evenly distributed through the year) and that the match won't be paid until the following January.

I don't know whose dumb idea this was, but I'm sure it's someone in HR who calculated that it would save $500k by delaying paying out matching and they're going to slap themselves on the back. Well since I'm quitting in June there goes my 401k match for those 6 months.

It's a complex mess and I'm sure what I wrote doesn't even make sense, but take it as a warning that companies do change policy and you have to know your company's particular rules to get your full match.

[erae]

I navigated this with my employer last year. You're looking to find out if they match per paycheck or annually. If it's per paycheck, you can still front-load your 401k and get the full match if your company has a true-up policy. Definition of true-up here: http://budgeting.thenest.com/definition-trueup-401k-26442.html

[jim555]

My company did not "true up", so I had to spread out over the whole year.

[401Killer]

I navigated this with my employer last year. You're looking to find out if they match per paycheck or annually. If it's per paycheck, you can still front-load your 401k and get the full match if your company has a true-up policy. Definition of true-up here: http://budgeting.thenest.com/definition-trueup-401k-26442.html

Per paycheck or annually is a good description when I go and talk to HR about it. I think that will help understand the question I have.

The lowest we can go is 10% to get the 5% match so if they do it by paycheck, I'll have to figure out how to front load for a period of time, then run it down to 10% for the remainder of the year.

Thanks for the replies guys.

[ooeei]

I navigated this with my employer last year. You're looking to find out if they match per paycheck or annually. If it's per paycheck, you can still front-load your 401k and get the full match if your company has a true-up policy. Definition of true-up here: http://budgeting.thenest.com/definition-trueup-401k-26442.html

Per paycheck or annually is a good description when I go and talk to HR about it. I think that will help understand the question I have.

The lowest we can go is 10% to get the 5% match so if they do it by paycheck, I'll have to figure out how to front load for a period of time, then run it down to 10% for the remainder of the year.

Thanks for the replies guys.

Just remember to account for any bonus/pay raises in that time frame. 

[Threshkin]

My company matches on a by-paycheck basis.  There is no true-up.  There is also a cap on matching at 6% of gross salary.  You can contribute more than that, up to 40% of gross but you only get the match on the first 6%.

It would be nice to get more but those are the rules.  You should carefully check the rules at your company and optimize for your situation.

[TabbyCat]

Depends on the company, but mine does not. I used to front load and then drop to 6% for the rest of the year, but one year I got an unexpected raise in the middle of the year which was amazing, but I was kicking myself for the month of match I didn't get. Now I frontload and drop to 10% or so for the rest of the year. My company allows changing contribution rates monthly, not sure if that is standard.

[jexy103]

As others have said, it depends on the employer. For any federal civilian employees out there wondering, GS employees are matched by paycheck with no true up. And contribution changes take effect the pay period following the change submission (at least for Army civilians), so if you submit the change in Monday of a new pay period, it will take about 5 weeks to see the new contribution amount hit your TSP account.

Last year I front loaded (PCS'd with spouse and wasn't sure I could get another job quickly), then scaled back to the minimum amount per pay period to max out. This year, I decided to keep it simple and just contribute the same amount per pay period all year long while DH front loaded (no match for active duty).

[rantk81]

I wish the tax code specified more rigid guidelines for how matches and true-ups worked, so that it was consistent between employers.

Before my employer was acquired, they had a good policy regarding matching and front-loading the 401k.  (Not a terribly great match amount, but the way they implemented it was very fair.)  If you reached the IRS contribution limit in a year, they would continue matching on every paycheck through the end of the calendar year.  If for some reason you missed part of the match during the year (and on subsequent paychecks up'ed your contribution higher than the match threshold) they would do an end-of-the-year true up too.

Of course, my employer was acquired by some other company, and the policy has changed, and the continued-matching after you max it out was shut off.  They said they will do a true-up, but you have to still be employed when the true-up happens in the following year.  They've also made mistakes with the matching contribution (probably a result of the mergers/acquisitions and consolidating payroll processes/companies)... and there were a couple times when they've made "adjustments" to my account.  Fortunately it hasn't been too much, just a hundred bucks here and there...

[PhrugalPhan]

Obviously this is a "you have to do your research in house and find out" situation. 

That said, I am happy I don't have to worry about this.  I hit the limit in August, but instead of any matching (we don't get any) I have a pension instead, so I look at that as my "match".  One less thing to worry about....

[401Killer]

I found out today that it appears my company does have a "True Up" policy. Even better, Merrill Lynch is in the house today so I'll be able to confirm this directly.

That is crazy good news!

[ender]

I found out today that it appears my company does have a "True Up" policy. Even better, Merrill Lynch is in the house today so I'll be able to confirm this directly.

That is crazy good news!

Keep in mind you want to know how the "true up" policies work as some are only trued at the end of the year, so if you max it out in March, then leave that job in November, you might not get the match from April through November.

[JLee]

I found out today that it appears my company does have a "True Up" policy. Even better, Merrill Lynch is in the house today so I'll be able to confirm this directly.

That is crazy good news!

Just keep in mind that if you change companies after you've maxed your 401k, you'll likely miss all matching from your next employer until Jan 1 (because you can't contribute anything else until next year).

[401Killer]

Keep in mind you want to know how the "true up" policies work as some are only trued at the end of the year, so if you max it out in March, then leave that job in November, you might not get the match from April through November.

Correct, I just got off the phone with ML and my company does have a True Up policy. You won't get the match if you quit, as anyone should expect.

So the idea is, if I made $100,000 and the company has a 5% match. I maxed out my 401K 6 months into the year, they would match during that period $2,500. Then for the next 6 months I will not be contributing, and they will not be matching anything. Then, in the 1st qtr of the next year they will True Up the remaining $2,500 into your account.

The only thing you loose is the interest in the $2,500 that would be invested over the 6 months if you saved at a 12 month rate. But the amount of interest you gain on the $18k and the company match by putting it in early would outweigh that difference.

That is really an amazing bonus.

[Goldielocks]

My company did not "true up", so I had to spread out over the whole year.

+1