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  • Writer's pictureSteve

Are You REALLY Getting All Of Your 401(k) Match?

It's that lovely time of year again - leaves are falling, the first flakes of snow are drifting by and holiday cheer is making its way into retailers everywhere.  But don't let the season's warm fuzzies distract you, for behind them a sinister predator lurks... Unbeknownst to you, it's taking hundreds, if not thousands of dollars from you, the responsible, financially savvy, saver.  

How is this happening?  Let's imagine you're gainfully employed with a salary of $240,000/yr.  Your employer offers a 401(k) plan with a 100% match up to 5% of your salary on every paycheck.  You're an overachiever so you contribute 10% of your salary. Let's even say you're a particularly cherished employee who was given a $20,000 Christmas bonus last year - which was paid in January 2023.  Because 10% of every paycheck goes into your 401(k), $2000 of your Christmas bonus went into your 401(k) in January.  Then, every month so far in 2023, $2000 (10% of $20,000) was contributed.  That gets you to $22,000 after October.  Note, you can only contribute $22,500 (if under age 50) into your 401(k) in 2023.  So, with your November paycheck, only $500 is contributed.  Recall the employer match I described in my example was 100% on the first 5% of your salary.  Your November salary is $20,000, so 5% of that is $1000.  But you can only contribute $500 as you're then maxed out.  Your employer only has to match your contribution so they only contribute $500.  Poof!  $500 gone.  It gets worse.  In December you can't contribute anything, so instead of the $1000 the employer would have contributed you get $0.  And that's the story of you missed out on $1500 of "free" money in 2023.  

How do we avoid this trap?  Two options - First, you could reduce the percentage you contribute each paycheck.  However, an easier (and in my mind, better) option is to instead contribute a flat dollar amount per paycheck.  Take the annual 401(k) contribution limit ($22,500 currently), divide by number of paychecks, let's say 26, and you get $865/per paycheck.  Next year, the 401(k) contribution limit is $23,000 so it'd be $884 per paycheck.  The downside of this method is you have to update the amount each year as 401(k) contribution limits are raised.  No matter what method you use, it does take some monitoring.  But the ~5 minutes of time it takes to keep an eye on this could be worth tens of thousands of dollars (when accounting for investment gains) over your lifetime!  

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