“Max out” your 401(k)……just don’t do it too quickly

Monday, October 5th, 2009 by Cass Chappell, CFP®


 I find myself giving clients this piece of advice more than any other recommendation I make:

“Contribute to your retirement plan…as much as you can afford”.


There is a caveat to that statement, however.  If your company offers a match, and you are going to be contributing the maximum amount allowed to your plan, don’t “max it out” until the end of the year.

I know what you might be thinking:  “WHAT????  WHY????”

For 2009, the maximum amount that can be contributed to a 401(k) is $16,500 ($22,000 if you are 50 or older).  The maximum for a SIMPLE IRA is $11,500 ($14,000 if you are 50 or older).

Occasionally, we meet an enthusiastic retirement saver who relishes the fact that she contributes the maximum to her retirement account early in the year.  If her retirement plan offers a match, she could be leaving money on the table!!!

The matching formula for 401(k)’s and SIMPLE’s are based off the compensation you earned during the pay period.


An example:

  • $5,000 in earnings this month
  • Employee contributes 10%
  • 3% employer match

RESULT: $500 from employee and $150 from the employer (3% of $5k)

 If you “max out” your contribution before the end of the year, all of the compensation that you earn after that point goes UNMATCHED.  It’s true!


A different example:

  • Susie is 40 and earns $120,000 per year ($10k per month). Her employer offers a 5% match. Susie contributes 20% to her plan.
  • Each month, Susie is putting $2000 into her plan. Her employer kicks in $500 (5% of $10k). During the month of September, Susie will have made her last allowable contribution ($16,500 is the maximum she can contribute).
  • For the months of October, November, and December she will not get a match on her compensation since she is not contributing. You only get a match when you are contributing!

She leaves roughly $1500 on the table ($500 per month for those last three months)


Susie’s intentions were good:  Contribute as much she is allowed as quickly as she can do it.  Put the money to work as fast as possible.  Usually, that is the correct strategy.  But, this situation is unique.  To maximize her contribution AND maximize the employer match, Susie should contribute 13.75% of her salary……NOT 20%

To calculate the OPTIMAL CONTRIBUTION, divide the maximum contribution amount ($16,500) by your annual salary.  The resulting percentage will allow you to contribute the maximum while receiving the FULL match.


In Susie’s case:

  • 13.75% of her salary is $16,500, so she will “max out” her contribution at the end of the year
  • Since she is contributing each month, she will get the full match ($500 per month for ALL TWELVE months)

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