High earners may need a strategy for getting the most from their employer match for their 401(k) contributions. Let’s consider an over age 50 employee who earns $216,660 annually (or $18,055 monthly). Assume that the employer offers a basic match of 100% of participant contributions up to 3% of pay, plus 50% of participant contributions up to the next 2% of pay, so a 4% match if the participant contributes at least 5% of their own money.
An eager employee who wants to get in the maximum allowable contribution of $26,000 ($19,500 + $6,500 over age 50 catch-up) early in the year, will sacrifice some employer match dollars, leaving free money on the table. Here is the math: If the employee contributes 24% of pay they will cap out at $26,000 at the end of June, with an employer match of only $4,333.20. They would be wiser to spread the contribution evenly over the course of the year at a 12% rate. Then they will receive $8,666.40 in employer match, an additional $4,333.20 in “free” money!
| Gross Income | 24% Employee Contribution | 4% Employer Match | 12% Employee Contribution | 4% Employer Match | |||
|---|---|---|---|---|---|---|---|
| January | $18,055 | $4,333.20 | $722.20 | $2,166.60 | $722.20 | ||
| February | $18,055 | $4,333.20 | $722.20 | $2,166.60 | $722.20 | ||
| March | $18,055 | $4,333.20 | $722.20 | $2,166.60 | $722.20 | ||
| April | $18,055 | $4,333.20 | $722.20 | $2,166.60 | $722.20 | ||
| May | $18,055 | $4,333.20 | $722.20 | $2,166.60 | $722.20 | ||
| June | $18,055 | $4,333.20 | $722.20 | $2,166.60 | $722.20 | ||
| 6‑month totals | $25,999.20 | $4,333.20 | |||||
| July | $18,055 | $2,166.60 | $722.20 | ||||
| August | $18,055 | $2,166.60 | $722.20 | ||||
| September | $18,055 | $2,166.60 | $722.20 | ||||
| October | $18,055 | $2,166.60 | $722.20 | ||||
| November | $18,055 | $2,166.60 | $722.20 | ||||
| December | $18,055 | $2,166.6 | $722.20 | ||||
| 12-month totals | $240,000 | $25,999.20 | $8,666.40 |
Over the course of 10 years this is an additional $43,332! Smartasset 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 at smartasset.com/retirement/401k-calculator.
Article originally posted in September 2015
