New max on my company's 401K...what should I do?

[NY Disney fan]

I can no longer "max out" my 401K. I was always putting in 20% and now the max is 50%. What should I do? Can I even afford to max out at 50%? Probably not. Any opinions?

 

[ilovemk76]

I can no longer "max out" my 401K. I was always putting in 20% and now the max is 50%. What should I do? Can I even afford to max out at 50%? Probably not. Any opinions?

It depends on your income. There max an under 50 person can put into thier 401K is $16,500. A person turning 50 in 2011 or over 50 can put in a max of $$22,000. This is a federal law.

Your plan can decide the max per paycheck that you can put in each paycheck until you hit the max. My company lets us to 100%. I prefer to front load mine but many just figure on hitting the max on the last paycheck.

 

[01spirit750]

Federal laws limit the total dollar amount (as the previous poster stated).
There is a theory that there is a financial advantage to front load your 401k contributions at the beginning of the year.

 

[NY Disney fan]

Should I start at 20% and raise it 1 or 2% a year? Is that a good strategy?

 

[prncess674]

The other thing you need to look at is how and if your company matches any funds. My company matches 50 cents on the dollar up to 6%. In other words they put in up to 3% for every 6% PER PAYCHECK! So if I reach my max contribution in a July and then don't contribute in Aug-Dec they don't contribute anything in Aug-Dec.

I put about 8% per check to my 401K each pay period and reach the max contribution threshold (hence "max out") in December hence maximizing my firm's contribution.


The only way you are truly "maxing out" your 401K at a 20% contribution rate is if you make 82,500 per year. (82,500 * 20% = 16,500)

If you make more than 33,000 and your company matches PER PAYCHECK, then it is ill advised to contribute 50% since you would max out your personal contributions before the end of the year. (33,000 * 50% = 16,500)

 

[NY Disney fan]

Oh I see, that makes sense. Thank you!

 

[timmac]

I can no longer "max out" my 401K. I was always putting in 20% and now the max is 50%. What should I do? Can I even afford to max out at 50%? Probably not. Any opinions?

Maxing out doesn't (or at least shouldn't) mean the max your employer allows you to contribute, necessarily. Rather it should be the maximum that your employer will offer a match on.

As several PP have pointed out, 50% might well be over the annual limit anyway.

 

[GrnMtnMan]

Federal laws limit the total dollar amount (as the previous poster stated).
There is a theory that there is a financial advantage to front load your 401k contributions at the beginning of the year.

Can you explain this theory?

My understanding has been that dollar cost averaging is the way to go. Meaning that you contribute an equal amount every period, evenly spaced. Doing that you buy when things are both cheap and expensive. In the end, you should balance out to market returns for the entire period.

The other potential downside to front-loading is whether or not your employer makes catch-up contributions. If you max out early in the year, you miss out on your employer's contributions the rest of the year....like only getting your matching percentage 4 months out of the year instead of 12 .Some employers will do a catch-up contribution at year end that makes its contribution equal to what it would have contributed had you been contributing all year. But some firms DO NOT do this. I reviewed this with my financial planner recently, and I had to go to my HR department to find out the policy. They are not required to do this....it's an optional thing.

 

[brerrabbit]

I have friends at work that frontload their 401(k)'s and their stock purchase plans every year. They have what they call a poor part of the year and a rich part. THeir theroy follows the pay yourself first theroy. They don't really care about the dollar cost averaging aspect of it. Also once you hit 9 years with our company the matching doesn't matter because they contribute 10% to your 401(k) each paycheck whether you are putting anything in or not.

 

[QVCshopper]

The other thing you need to look at is how and if your company matches any funds. My company matches 50 cents on the dollar up to 6%. In other words they put in up to 3% for every 6% PER PAYCHECK! So if I reach my max contribution in a July and then don't contribute in Aug-Dec they don't contribute anything in Aug-Dec.

I put about 8% per check to my 401K each pay period and reach the max contribution threshold (hence "max out") in December.

This isn't necessarily true. My DH reached the max in Oct. last year. They automatically switched him to a zero contribution, but he still got the 4% match (on the first 4%) for the remainder of the year. In January, they switched his contribution back to what it was.

 

[prncess674]

This isn't necessarily true. My DH reached the max in Oct. last year. They automatically switched him to a zero contribution, but he still got the 4% match (on the first 4%) for the remainder of the year. In January, they switched his contribution back to what it was.

I didn't say ALL companies work like this, I said this is how MY company works and the OP needs to find out how HER company and make sure that her company doesn't work like mine and she is leaving money on the table.

 

[Pakey]

I front load mine. I get my bonus in January and I put the first $22,000 of it in my 401k. However, I usually put it into a money market fund and then move it depending on what's going on with the market. I haven't found that it's made sense to shove it all into a particular fund in January. However, I always want to pay myself first because I never know when I might be tempted to spend it.

I am the plan administrator for our company and individuals can set their contribution limits all the way to 100% of their paycheck if that's what they want. The contributions will stop when they hit their limit, depending on their age. Our plan is set up so that the employer match is based on YTD earnings, not paycheck by paycheck. So although I put all of mine in with the first paycheck, the employer match goes in for me every payday.

 

[malibuconlee]

One other thing to think about...

Maxing out your 401K and company matches. DH's company matches per pay period. Meaning if you max out your 401K in October you will miss out on their match for November and December. We have to manage ours so we don't hit it too early.