We encourage clients to max out workplace retirement accounts when possible (401k limit is $18,000 annually, or $24,000 age 50+).  At a minimum, contribute as much as your employer will match; its free money! The employer matching is often structured as $.50 cents for every dollar you defer, up to 6% of your salary, effectively a 3% raise.

However, with some plans, aggressive saving and maxing out before year end can actually reduce the company match. For example:

A worker earning $10,000 each month saves 20 percent of earnings in a 401(k) for which the employer matches dollar-for-dollar up to 6 percent of earnings. That means that in the ideal situation, the worker would receive 6 percent of $120,000, or $7,200, in matching contributions. But by saving $2,000 each month, the worker will hit the $18,000 limit after just nine months. As a consequence, that worker might only get credit for nine months’ worth of matching contributions, or $5,400, giving up $1,800 in matching.

Some plans do allow for this and offer a “true up” provision to make the full match regardless of timing.  However be sure to check your plan if you are maxing out before year end.  If no true up provision, spread your contributions throughout the year.

For a deeper analysis, start with the questions:

  • What is the matching formula?
  • How often are matching contributions made (per pay period, monthly, quarterly, annually)?
  • If maxing out early, do they provide “true up” contributions?

BUT….if you are concerned you will not be with the employer for the full year, you may still want to consider maxing out early.  Either due to not having a plan for remainder of year or not being eligible for match with new employer.