Savers who max out their 401(k) contributions at the start of the year could be at risk of losing some of their employer match. This scenario occurs because many 401(k) plans require a consistent contribution throughout the year to receive the full employer match. However, some plans offer an additional “match” or deposit at the end of the year, covering any amount the employer would have been required to contribute if the employee’s contributions had continued throughout the year.
Experts always recommend carefully and carefully reviewing your 401(k) plan documents before deciding how and when to make your contributions.
Understanding whether your plan includes an adjustment feature can prevent significant losses. When planning for retirement contributions, investing consistently over time often encourages growth in your funds. However, if you max out your 401(k) too early without a matching feature in your plan, you may lose a significant portion of your employer match.
How the Employer Match Works in Your 401(k)
Most 401(k) plans include an employer match, meaning the employer deposits additional money into your account based on a percentage of your contributions.
To receive the full year’s match, you typically must contribute a specific percentage of your income each paycheck. Some plans, however, allow an adjustment at the end of the year for those employees who maximize their contributions before December.
Be very careful, because this scenario is like walking on thin ice. The absence of a match can be a total nightmare for employees saving in plans like 401(k)s, as they could lose some of the employer match.
The Importance of Adjustment to Avoid Losing Money in Your Retirement Savings
For example, an employee under age 50 who earns $200,000 a year and has a 5% unadjusted match could lose about $4,200 if they max out their contributions before the end of the year. This lost amount could add up to a considerable sum over time, due to compound growth.
To avoid losing the employer’s counterpart in this type of retirement saving plans, it is advisable to distribute the contributions equally throughout the year. This also means monitoring any changes to your income, such as salary increases or bonuses, that could affect your contributions.
Before setting up your 401(k) deferrals, confirm if your plan includes a match. Review the “contributions” section in the 401(k) plan contract summary description.
Although the document will not explicitly mention the absence of an adjustment, it is advisable to confirm this information with your company’s human resources department. You can also check with your plan provider to definitively confirm that this clause is included.
New Limits in 2024 for 401(K) Contributions
- Beginning in 2024, the contribution limit for employees participating in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increased to $23,000 in 2024, from $22,500 in 2023.
- The limit for traditional IRA plans increased to $7,000 for those under age 50. For those age 50 or older, the limit is $8,000.
- The amount individuals can contribute to their SIMPLE retirement accounts was increased to $16,000, from $15,500.
Additional Contributions for People Aged 50 or Older
- If you are age 50 or older, you can make an additional contribution of $7,500 to your 401(k) plan. This means that your total contribution limit would be $30,500.
- Catch-up contributions do not count toward the regular contribution limit.