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Losing The Match by Maxing out your 401k too Early

Updated: Nov 23, 2021

Maxing out your 401k each year is not an easy thing to do. You have to be making a good income and not have any crappy consumer debt hanging over your head in order to reach this level of saving. For those of you in this boat I tip my hat, but make sure you do not fall victim to the costly mistake of maxing out too soon and leaving a portion of your employer match on the table.

I remember the first time I was asked the question “Should I max out my 401k as soon as possible so the money starts working for me right away?” It’s a good question. My first reaction was yes...if you plan on maxing it out why not get it in there as fast as possible? In the typical financial advisor fashion, I confidently answered quickly thinking that I know, then let it swirl around my head for a few hours, then realized I was wrong, then quickly called my client to give them the correct answer.

Now I know better. When I get that question the only way I can give a correct answer is by asking a question of my own - Does your employer match your contributions? If the answer is no I respond with “If you don’t have credit card debt, have an adequate emergency fund and you plan on maxing out your 401k contributions then yes...history has proven that the earlier you get it in there the better (Obviously there have been some exceptions like 2008).

BUT….If the answer is do have an employer match then BEWARE!! You could potentially miss out on thousands of dollars of free money.

So why does it matter if you get a match from your employer? The answer is because the employer match is capped at a percentage of each paycheck, If you max out early in the year the 401k contributions stop and so does the matching contribution. The easiest way for me to explain it is through a simple example.

Let's say that your salary is $120,000 a year, you get a dollar for dollar match up to 6% of your salary and you get paid twice per month (24 paychecks per year each one for $5,000).

The maximum you can contribute to a 401k in 2021 is $19,500 and the potential match from your employer in this scenario is $7,200 ($120,000 x 6%).

If you spread your contributions evenly throughout the year you would contribute $812.50 per paycheck and your employer match would be $300 per paycheck. This would result in you accomplishing your goal of maxing out your 401k ($19,500) and receiving the full 6% match ($7,200) from your employer. Total contributions for 2021 = $26,700. Nice!!

Now, let’s say you juice up your contributions to $1,950 per paycheck so you are done after 10 paychecks (5 months). Your employer is still only going to match up to 6% of your paycheck ($300). Since you maxed out after May’s paychecks, you are done and not be able to contribute any more for the year. For the 5 months that you contributed your employer match would have been a total of $3,000 ($300 x 10 paychecks).

As you can see, compared to spreading out contributions evenly throughout the year you would have missed out on $4,200 of employer matching. Not cool…

If this is the first time you are hearing about this and you are looking for the panic button, take a deep breath because not all 401k plans are created equal. Your plan may not operate in this fashion. Some plans will look at annual salary and overall contributions for the year and match accordingly, they call it a true-up. Your next move is calling Human Resources to see how the match is handled within your plan.

Hopefully that was easy to follow. If you have any questions or comments please leave them below.

To becoming great with money….




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