High Earners: Maximize Your 401(k) Match Using This Simple Tool - Rodgers & Associates
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High Earners: Maximize Your 401(k) Match Using This Simple Tool

High earners need a strategy for getting the most from the employer match for their 401(k) contri­bu­tions. Let’s consider the over age 50 employee who earns $240,000 annually, $15,000 monthly, and a $60,000 bonus on 3/31. Let’s assume that his employer offers a basic safe harbor match of 100% of partic­ipant contri­bu­tions up to 3% of pay, plus 50% of partic­ipant contri­bu­tions up to the next 2% of pay, so 4% if the partic­ipant contributes at least 5%. If he is eager and wants to get in his maximum allowable contri­bution of $24,000 early in the year, he will sacrifice some employer match dollars, leaving free money on the table. In this example, the employee contributes 16% of pay. But this caps out at $24,000 at the end of June with an employer match of only $6000. He would be wiser to spread his contri­bution evenly over the course of the year at a 10% rate. Then he will receive $9600 in employer match, an additional $3600 in “free” money. Here is the math:

Gross Income16% Employee Contri­bution4% Employer Match10% Employee Contri­bution4% Employer Match
January$15,000$2,400$600$1,500$600
February$15,000$2,400$600$1,500$600
March$15,000$2,400$600$1,500$600
Bonus$60,000$9,600$2,400$6,000$2,400
April$15,000$2,400$600$1,500$600
May$15,000$2,400$600$1,500$600
June$15,000$2,400$600$1,500$600
July$15,000$24,000$6,000$1,500$600
August$15,000$1,500$600
September$15,000$1,500$600
October$15,000$1,500$600
November$15,000$1,500$600
December$15,000$1,500$600
$240,000$24,000$9,600

Over the course of 10 years this is an additional $36,000. Yahoo Finance provides a calcu­lator which can help you see the impact of different employee contri­bution percentages on the amount of your employer’s match. You can find it here.