Maxing out your 401k plan early can end up making you lose money, but you can prevent that. Find out how!
Starting early with retirement savings usually leads to better growth over time. However, according to experts, maxing out your 401k too early in the year could result in lost employer contributions, unless your plan includes a special feature.
Most 401(k) plans offer an employer match, where the company adds extra money to your account based on what you contribute. Generally, to get the full match, you need to contribute a certain percentage of your income with each paycheck throughout the year.
Some plans, however, have a “true-up” feature. This ensures that if you max out your 401(k) contributions before the year’s end, your employer will still deposit the remaining match amount into your account. “It’s an awesome perk,” says Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando – Florida, but not all plans have it.
In 2022, about 67% of plans that offer matches more than annually had a true-up feature, according to the Plan Sponsor Council of America’s annual survey. Larger companies are more likely to offer true-ups, experts say.
Without a True-Up
Without a true-up, missing part of the company match can be “an absolute nightmare”, Lucas said. Imagine you’re under 50, earning $200,000 annually, and your company offers a 5% 401(k) match without a true-up.
With 26 pay periods and a 20% contribution rate, you’d hit the $23,000 deferral limit after 15 paychecks, receiving only about $5,800 in employer matches. You would miss out on about $4,200 of the potential remaining 5% match for the year, which could have grown substantially over time. To avoid this, spread out your contributions evenly throughout the year and keep an eye on changes such as raises or bonuses, Lucas added.
Check Your Plan
Before deciding on your 401(k) contributions, check if your plan includes a true-up. “That’s one of the things we investigate,” said Dan Galli, a certified financial planner and owner of Daniel J. Galli & Associates in Norwell, Massachusetts.
Look in the “contributions” section of your 401(k) summary plan description for any mention of a true-up. “It’s never going to say, ‘This plan does not have a true-up’”, Galli said. If it’s not clear, ask your human resources department to confirm, this might even encourage your company to add a true-up feature in the future.