Strategies For Maxing Out Your 401k/403b and Company Match, True-Up Contributions

Why the interest in 401k limits? Well, we found out that my wife now gets a company match to her 403b retirement plan. Score! I then wanted to explore how to maximize both our $16,500 401k limits and the company match.

Example: Maxing Out But Missing Out Too

You make $120,000 per year and get a full 3% company match during each pay period. Let’s just say you get paid $10,000 gross monthly. However, you are a really motivated saver and can defer 20% of your income each month into the 401k.

For the first 8 months of the year, you put away $2,000 (20% of $10,000) and the company matches $300 (3% of $10,000). That’s brings you to $16,000 in salary deferrals. On the 9th month you can only contribute $500, which the company also matches $300 again. On the remaining 3 months of the year, you can’t contribute at all, so there is nothing to match! Even though you contributed significantly more than 3% of your salary, you’ll miss out on $300 x 3 = $900 of free money.

Solutions and Potential Problems
The solution is usually given to space out your salary deferrals evenly throughout the remainder of the year. For the above example, you would divide $16,500 by 12 = $1375 each month. If you can only set percentages, you’d set aside 13.75% each month ($1,375 / $10,000).

The problem with this is that for those people who earn hourly wages, overtime, or bonuses, it can be hard to synchronize. Get paid too much, and you’ll lose match again. Get paid too little, and you might max out your match, but not fully reach the $16,500 limit. Also, if you quit or are laid off before the end of the year, you might not be able to reach the limits either.

My tweaked solution. I would vary the percentage so that you always contribute at least 3% each pay period the entire year, but otherwise front-load contributions early on. Again with the example, you could set aside the $2,000 per month for 6 months, and then put in $750 per month for 6 months. Percentage-wise, this is 20% for first half the year, and then 7.5% for the last half. This way, you are balancing getting your annual limit maxed out as closely as possible, along with getting all the available match.

True-Up Contributions

But before going too far, you should ask your benefits administrator whether they offer what is called “true-up” contributions. What this does is compare your year-to-date (YTD) contributions to your YTD salary. If you contributed at least 3% of your YTD salary, but did not receive a 3% company match, then they will send in an additional contribution to “true-up” the numbers.

Some companies perform this true-up calculation after every pay period, while others wait until the end of each year. If they true-up every pay period, then it would seem to be a good idea to contribute as much as you can as early as you can – you’ll get the full year’s match early this way.

Our company does one true-up after the end of the year, and the credit doesn’t show up until March. However, I was also told that if you aren’t employed in March, you won’t get this credit. So again, the front-load with minimum method might be the best idea to get your match as it comes available.

As I write this, I realize that I really overthink some of this stuff. What can I say, I’m excited about our new match, and I just can’t help myself!

Comments

  1. Indeed, this is a good strategy. I was doing this for two years now. However, there was one flaw in my computation. Until this year I believed that the total (my contribution + company match) needs to fit in the yearly 401k limit so while I was thinking that I maxed out the contributions I really didn’t because I was computing my percentages based on (401k limit – company match) / months.

    However, this year I hope I’ll truly max out my 401k.

  2. BTW, is there a chance that I could contribute to my 401k for 2008 in 2009? Kind of the same way one can contribute to an IRA in 2009 for 2008?

  3. Over the Cubicle Wall says:

    I’ve thought this thing through myself, and you have given a pretty thorough summary. I was not aware of the true up contribution.

  4. My company just starts taking the contributions after tax, after the 16500 limit is reached. So I contribute 2000 a month for 8 months then in the 9th month 500 is before tax and the rest is after tax. After the new year I call up and ask for them to cut a check, or just leave it in there. The match is matched no matter if it was before tax or after tax.

  5. Not everyone will have this problem but if you are a very aggressive saver you might. The IRS total limit on what can be contributed (I think 49K this year) includes your contributions and company match. So despite my company having a true up program, there are some people who miss out on it because they have already maxed out on the overall IRS contribution limit and the company can’t give them any more even though the employee didn’t get all the matching that they were eligible to receive.

  6. That is certainly possible, but it would be quite a feat. I’ve read reports that show that only 4% of companies match 100% of an employee’s contributions on up to 6% of pay. The rest match less. At 6% match, to max out the limit you’d need a salary of $542,000 per year! :)

    Of course, another problem may be if you have your own Solo 401k or more than one job with a 401k plan.

  7. I just noticed that I made a contribution of about $18K to my 401 K last year, what will happen?

  8. It’s possible to hit this limitation with compensation less than $542K depending on your plan and contributions. The limit includes all types of contributions to your 401K: pretax, post-tax and matching. At my company you can do a maximum of 25% deferral (in any combination of post / pre tax you want). There is also that ‘average’ match on the first 6% of your pay – 100% on the first 4% and 50% on the remaining 2%. So if you make $200K and contribute the maximum 25% deferral you would reach a point where no additional contributions could be made. You have to plan out your contribution split to maximize the pretax and match but you also have to realize that the company isn’t going to be able to catch you up on the true up if you’ve already hit the $49K.

    From the IRS web site: There are other limits that restrict contributions made on your behalf. In addition to the limit on elective deferrals, annual contributions to all of your accounts – this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts – may not exceed the lesser of 100% of your compensation or $46,000 (for 2008, $49,000 for 2009). In addition, the amount of your compensation that can be taken into account when determining employer and employee contributions is limited. In 2008, the compensation limitation is $230,000; for 2009, the limit is $245,000.

  9. Anonymous says:

    Tim – as explained in Jonathan’s previous post, EMPLOYEE CONTRIBUTIONS are limited to $16,500. Therefore, your scenario of contributing 20% of your $200K salary is not a possibility. Your contributions would have to stop at $16,500.

  10. Add to the complications… I get paid my annual bonus in February. That bonus gets my regular (14.5%) contribution to the 401(k)… I end up maxing in around October. But the fact that I can no longer contribute to the 401(k) in October gives me two months of extra cash to cover Christmas expenses, and I’ve still maxed my contribution and gotten the company’s 7% match maxed.

  11. My company only inputs their matching funds once a year, after the plan year has ended. I still haven’t received the match for 2008 for example. So you wouldn’t have to worry about this in my case.

  12. Hi Anonymous -
    It is complex and the definitions matter. The $16,500 limit is not on total employee contributions only on “Elective Deferrals”. The deferrals word is important. Despite how good a 401K can be for you, you are only deferring tax and only doing that deferral on the pretax portion of your contribution. It is only the pretax portion that is impacted by the $16,500 limitation on employee contributions. The post tax and employer match is not part of that. It’s possible (have done it myself so I try to warn others) to lose part of your match if you are not careful about the timing of your contributions.

  13. My employer’s plan has a “match maximizer” feature: once the limit is reached the match is maximized and matching funds added if you reached the limit too early.

    This year we also have a “deferral maximizer” feature. This way rather than specify a fixed percentage, I can simply select to maximize my contribution.

    “Your contributions would have to stop at $16,500.”
    Add $5500 catch-up starting from the year of your 50th birthday. So it is $21000.
    My employer has different rules for match based on when you started working or rather on what pension plan you had when all pension plans were frozen at the end of 2008:
    - Those who had the old defined benefit plans get 100% on first 6% deferral plus 4% employer contribution (for the most part this includes long-time employees 49 and older);
    - those who had defined benefit pension plan introduced 10 years ago get 100% match on first 6% plus 2% company contribution
    - those who didn’t have any pension (those hired after 2005 if I am not mistaken), get 100% match on first 5% deferral plus 1% company contribution.

    So it is effectively, 10%, 8% or 6% from the employer depending on when you were hired and the years with the company (more or less). First 5-6% of this is the match and the rest is company’s contribution that gets deposited regardless of your deferral percentage. Before this year those of us who had pensions got 50% on first 6%.

    So assuming your 50th birthday is in 2009 (my case), and you’ve been with the company for over 20 years and chose to stay with old retirement plan 10 years ago, you can get additional 10% of your salary in employer’s money.

  14. Jonathan or someone please help me understand, as I am a bit confused by the example provided in the post. The 3% stated as a “match” sounds more like a salary based contribution, since it is based not on a percentage of how much you put into your 401k account but on your salary as a whole. Therefore, wouldn’t the company put $300 in your 401k account every month regardless of whether or not you maxed out your contributions at $16,500? The salary based contribution by the employer would not count towards the $16,500 limit but instead the $49,000 limit, correct? Thank you in advance for the clarification.

  15. ^^^ Nevermind, I understand now. ^^^

  16. Great post – things I hadn’t thought about.

  17. One issue I’d like to point out that bit me in 2008. I did my calculations based on pay periods as a function of the weeks in a year. I didn’t take into account that our last pay period straddled the last week of 2008 and the first week of 2009. Thus, my last week of pay ended up contributing to my 2009 401k and I was something like $610 short of the $15500 max for 2008 :(

    I feel like I met my goal in principle :)

  18. Just to be sure I checked about the True-Up policy with my company and they actually do that at the end of the calendar year. They also automatically stop anything that goes above the $16,500 annual limit so I just made the contribution be a percentage that is higher than the percentage of the 401k limit compared to my salary. This way I will finish contributing, and maxing out the contribution, for the year well in advance.

  19. The privately owned company that I worked for recently laid off 120 of us. They have decided to not give us that portion of our company match dollars that we all had in our portfolios withour 401K They issued a letter this past July 21st and back dated to July 1st stating that this was going to happen. How can this be legal if they had already “given” you the funds?

  20. Someone please help me understand “True Up”. My company offers a Safe Harbor Match of the first 3% at dollar for dollar and the 4th & 5th % at $.50 per dollar. If I make 35K per year what should my company match be if they also “True up” at the end of each calendar year? Is the true up match based on the percentage of how much you put into your 401k account or on your salary as a whole? If a true up provision exists souldn’t my company put 4% in my 401k account every pay period regardless of whether or not I even make elected deferral contributions or max out contributions at $16,500? The salary based contribution by the employer would not count towards the $16,500 limit but instead the $49,000 limit? If I did not contribute/defer any contributions for the year at all, is my employer still required to place match funds in my account based on my annual 35K salary? Help!!

  21. My company told me I could only have 12% of my pay (pre=tax deduction) in my 401K. It’s no where near the $16,500 limit (I’m 53)
    they only match 1%. I would like to have 30% each pay period deducted for my 401K. Can they set a liimit like that???

  22. @Peggy – Unfortunately, from what I have read, yes they can set such limits even if much less than IRS limits. However, if you talk to your HR department or other managers, ask them why… you many convince them to raise the limits.

  23. Gross salary 550k , age 66, Government hospital 6% match. That would be 33k emp and 33ee. What is limit tax deferred? I feel is 23k and 23k.
    Could other 20 go somwhere like 457 which is available?

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