High Earners: Maximize Your 401(k) Match Using This Simple Tool

Don’t leave money on the table.

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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 Income 16% Employee Contribution 4% Employer Match 10% Employee Contribution 4% 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.

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