Contributing too much too early into your 401(k) or 403(b) retirement plan could mean missing employer matching contributions.
Employer matching formula
Employer matching contributions are typically based on a percentage of the employee's contributions, up to a certain limit. For example, an employer may match 50% of an employee's contributions, up to a maximum of 6% of the employee's salary. So, if an employee earns $200,000 per year and contributes 6% ($12,000) to their 401(k), the employer will match $6,000.
Reaching the limit
However, if an employee reaches the maximum employee contribution limit of $22,500 for 2023 (or $30,000 if age 50+) before the end of the year, they may miss out on employer matching contributions for the remainder of the year. This can be a significant loss, especially for employees who contribute a large portion of their salary to their retirement plan early in the year.
Tip 1. Timing contributions
One solution is to adjust your deferral rate so you have an employee contribution, and therefore employer match, on each paycheck. To be savvy, make heavy contribution early in the year so you benefit from that year’s investment gains then reduce your contribution for the later pay periods to still get the maximum employer match.
Tip 2. True-up contributions
Another option is an employer true-up contribution. This allows employers to make up for any missed matching contributions at the end of the year. Not all employers offer true-up contributions, so it's important to check with your payroll or your plan documents to see if this is an option for you. Similarly, some employers make matching contributions at the end of the year instead of each pay period. Like the true-up, this makes the timing of the employee’s contributions irrelevant.
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For personalized help eliminating debt, investing smart and securing retirement, please contact Mark Ziety, CFP®, AIF® 608.442.3750.
Mark Ziety, CFP®, AIF®
WisMed Financial, Inc. part of the Wisconsin Medical Society.
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