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Maxing Out Your Work Retirement Plan (401k, etc)? - Be Careful

Last updated:  2/20/2023

Are you maxing out your retirement plan at work (401k, etc)?  Does your employer offer a matching contribution?  If you answered yes to both of those questions, this email is specifically for you.  Because you might be missing out on free money.  Work retirement plans may include 401k plans, 403b plans, 457 plans, etc.  For the purpose of this email, I will talk about the 401k since the 401k is the most common.

First, what is the maximum you can contribute to your 401k?  In 2023, the contribution limit for anybody under the age of 50 is $22,500.  For people age 50 and over, your contribution limit is $30,000.

So what's the problem?  The potential problem arises when you have an employer who provides matching contributions AND you max out your 401k plan BEFORE the end of the year.  Why might that be a problem?  Because once you have maxed out your 401k plan, you have to stop making contributions.  And when you stop making contributions, your employer has no contributions to match.  So you might be missing out on some of your employer's matching contributions.  Matching contributions are like receiving free money.  So unless you don't like free money, you don't want to miss any matching contributions.

Here's an example:  Let's say you are 40 years old, make $200,000 per year, contribute 15% of your income to your 401k, and every paycheck, your employer matches 100% of your contributions up to 3% of your income.  Well, 15% of $200,000 is $30,000.  But remember, the maximum you can contribute is $22,500.  So if you are contributing 15% of your $200,000 income, you will have reached your $22,500 maximum in 9 months (assuming your income and contributions are spread out evenly over the year), and then you will have to stop making contributions.  After you stop making contributions, there's a chance your employer might also stop making matching contributions...because they don't have anything to match.  If your employer stops making matching contributions, you will have missed out on the final 3 months worth of matching contribution, or in this case, $1500 in free money.  Remember, matching contributions are like receiving free money.

What should you look for?  This problem doesn't affect all 401k plans, so here's what to look for.  If your 401k plan has what's known as a "true-up" provision (or "true-up" contribution/feature), you should be fine.  A 401k plan with a "true-up" provision should make sure you don't miss any matching contributions you would normally be entitled to, even if you max out your 401k plan before the end of the year.  Any "true-up" contributions are normally made at the end of the year, or at the beginning of the next year.  But don't bank on this.  According to a 2015 survey by Deloitte, only approx 45% of 401k plans in the survey offered a "true-up" provision.  So that means approx 55% of the 401k plans in the survey did NOT offer a "true-up" provision.  Here's the link to the Deloitte survey:  Deloitte Survey (Click here)

What's another thing to look for?  When does your employer make the matching contributions?  If your employer matches your contributions every pay period, that could be a problem.  Because then the matching contributions stop when your contributions stop.  If your employer makes a one-time lump sum matching contribution, usually at the end of the year or at the beginning of the next year, then you are most likely okay.  But don't bank on this either.  Most employers do NOT make one-time lump sum matching contributions.  Most employers make their matching contributions when you make your contributions, every pay period.  And that could be a problem.

How can you find out if this is a problem with your 401k plan?  Ask your human resources department, benefits manager, employer, and/or your 401k plan sponsor about this issue.  This is not a very common question, so don't be surprised if they have no idea what you're talking about when you first ask.  I suggest forwarding them this email.  This email will help explain your concern.  Hopefully, they reply back to you with a satisfactory answer.

What else can you do?  Spread out your contributions.  If your employer does not have a "true-up" provision or does not do one-time lump sum matching contributions, then you need to spread out your contributions over the full year.  Don't max out your 401k plan early in the year.  To figure this out, divide the maximum annual contribution by your annual income.  So in the example I used above, you would divide $22,500 (annual max for anybody under age 50) by $200,000 (annual income).  In this case, this person would want to contribute no more than 11.25% of their income ($22,500/$200,000 = 11.25%).  At 11.25%, this person would max out their 401k plan at $22,500 and spread out their contributions over the full year so they don't miss any employer matching contributions.  Problem solved.

HyLine Bottom Line:  If you have an employer who provides matching contributions AND you max out your 401k plan BEFORE the end of the year, be careful.  Make sure you aren't missing out on some of your employer's matching contributions.  Because matching contributions are like receiving free money.

What can I do at HyLine Wealth to help you with this potential problem?  Not much.  Unless I am the advisor for your 401k plan, I can just pass along this information to help you.  This tip is on me!

Want more investment "tips"?  We have a lot more great ideas and suggestions to help you be smarter with your money.  CLICK HERE to get these "tips".

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Questions?  Don’t hesitate to reach out.  If you have questions on anything, feel free to email me at brock@hylinewealth.com or call me at (605) 275-2343.

Think some of your friends might be missing out on “free money” in their retirement plan (401k, etc)?  Help them!  Use the social media links at the bottom of the page to share this with them.

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Brock Hyde
Investment Adviser

HyLine Wealth
221 S Phillips Ave, Suite 207
Sioux Falls, SD 57104
Office (605) 275-2343

Location-Independent:  Pretty much wherever you are located, we can work together.  I am registered in the state of South Dakota and have an office in Sioux Falls.  The “de minimis exemption” allows me to do business in most other states (with only a few exceptions).  I consider myself "location-independent" as I use a heavy dose of technology to communicate and serve you.  This includes screen sharing technology, electronic signatures when possible, and shared client portals so we can view the same information at the same time.  Frankly, I can probably offer you better service than your "local" financial advisor.

HyLine Wealth is an investment advisor firm registered in the State of South Dakota. We do not provide tax or legal advice. Past performance is no guarantee of future results.  Always consult your financial advisor, tax advisor, attorney, and/or insurance agent before implementing any specific strategy to make sure it is right for you and your unique situation.  We are not responsible for the accuracy or upkeep of information on the links we provide to outside websites.  If/when we provide a link to an outside website, be sure to independently confirm the accuracy of any information.