Thoughts on maximizing the companies 401K matching contributions

I was a bit late in life, until I realized how valuable tax deferred investments were.  I always assumed that I didn’t want to put money into a tax sheltered account since I was always planning on retiring early.  However I now realize that was such a poor idea.  What I didn’t really think about is that there is a portion of your early retirement also includes the period where you can access those tax deferred accounts.  Oh well live and learn.  So in the last few years I have made sure I maximize the programs that are available such as my 401k contributions.

I suspect many companies provide some matching dollars to your 401K contributions.  For example, my company matches 100% of the first 4.5% contributed.

The first year I maxed my yearly contribution to the 401k, I encountered a situation that I really didn’t think about.  So if you desire to max out your 401k, you might be tempted to do it as quickly as possible.  I guess it is obvious, but it wasn’t apparent to me the first time this happened, that once you stop contributing to your 401k, the matching contributions also stop. 

So if you are planning on maxing out the contribution and you also plan on working the full year it would be advisable (in my opinion) to space out the contributions so that you continue to get the company matching dollars to get as much “free” money as you can.

You will want to contribute at least as much as the employer match.  In my case you would want to contribute at least 4.5% of your salary.  But let’s say you contribute 10%.  Depending on your income you might max out the limit earlier in the year and still have some paychecks to go.  As a result of that you wouldn’t maximize the employee contributions.

So it is my opinion that you want to keep track of how much you have contributed and adjust throughout the year to maximize this wonderful benefit.

Here is a calculator that you can use to help identify the optimal percent you should contribute that will both maximize your contribution as well as fully utilize the employer match percentage.

https://www.calcxml.com/do/qua09?skn=

This gives you a good feel as to how much to contribute, to reach the yearly maximum contribution, near the end of the year, however if you have a compensation plan that has bonus’s, you may want to either not contribute a percentage of your bonus or just keep an eye on it throughout the year so that you can maximize this benefit.

Fidelity 401k allows you to specify what percent of your regular income you want to contribute and independently how much of your bonus income you want to contribute.

Hope this helps you think about some things that I had to learn the hard way.