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.
