How Saving Too Much, Too Early In The Year, Can Hurt Your Retirement

When it involves retirement planning and build up the proverbial “nest-egg,” there are few items of recommendation extra universally accepted than “save as much as possible as early as possible.” Certainly, taking such motion is commonly among the finest methods to develop your retirement financial savings, however like almost all generic statements about how “you” ought to plan for retirement, there are exceptions to the rule.

Failure to determine and perceive when these exceptions apply could go away you with much less cash to spend and revel in throughout your golden years. Case in level… contributing an excessive amount of to your 401(okay) or comparable retirement plan too early within the yr could also be hazardous to your retirement-savings well being!

How so that you ask? Because by contributing an excessive amount of, too quickly to your 401(okay) or different retirement plan, you may doubtlessly scale back the quantity of so-called “free money” matching contributions you obtain out of your employer!

2019 401(okay) Contribution Limits

401(okay)s, like most tax-favored accounts, restrict the amount of cash that you would be able to contribute every year. For 2019, the utmost quantity of wage that may be deferred right into a 401(okay) is $19,000. If you might be 50 or older by the top of the yr, you may add an extra $6,000 “catch-up contribution” as nicely, bringing your complete 401(okay) wage deferral restrict for the yr to $25,000. It’s additionally price noting that in case your 401(okay), 403(b), Thrift Savings Plan, or comparable retirement plan has a Roth choice, the $19,000/$25,000 restrict is complete quantity of wage that may be deferred into each the Roth aspect of the plan (i.e. the Roth 401(okay)) and the normal aspect of the plan, mixed.

You might also be acquainted with the “overall limit,” also referred to as the “limit on annual additions”, which is the utmost quantity of complete contributions you may obtain in your 401(okay) for the yr from all sources, together with your personal wage deferrals, in addition to employer matching contributions and profit-sharing contributions. For 2019, the general restrict is $56,000.

How Contributing Too Much Too Soon Can Reduce Employer Matching Contributions

About half of all 401(okay) plans supply some kind of matching contributions, the place the plan sponsor (your employer) will use a system to deposit funds into your account primarily based on how a lot you contribute for your self. Many folks consider that, so long as they contribute “enough” into the plan, they may obtain the utmost employer matching contribution. But the fact is that in some instances, it’s not nearly how a lot you contribute to your plan, however when these contributions happen.

Incredibly, in some conditions, contributing an excessive amount of to your 401(okay) or different plan too early within the yr can value you. Those with greater incomes are sometimes extra liable to working into this downside, just because they’ve a better capability to “fill up” their 401(okay)-salary-deferral “bucket” early within the yr.

The key downside is that whereas plans can deal with the calculation and mechanics of matching contributions in several methods, many plans calculate these matching contributions on a per-pay-period foundation.

“What does that mean?” you ask?

Simply that in case your employer matches a particular share of your wage, they could solely match you as much as that share on every your checks, and not on how that verify quantity associated to your complete annual wage! That’s sophisticated, I do know. So let’s check out an excessive instance to make the purpose crystal clear.

Example: John is a 60-year-old govt at a big agency. In 2019 John’s wage is $840,000 (good to be John, proper?), which is paid to him in bimonthly (twice per thirty days) installments. Therefore, the gross quantity of every of John’s 24 checks for 2019 might be $35,000 ($840,000 wage / 24 checks = $35,000 gross quantity per verify). Furthermore, John’s employer affords a 401(okay) with a 5% dollar-for-dollar match, however like many employers, it applies that match on a per-pay-period foundation.

 Since John in 60 and is nearing retirement, he’s trying to do no matter he can over the subsequent few years to maximise his financial savings. And he’s all the time heard that contributing as a lot as potential as early as potential to a retirement account is an efficient strategy to go. As such, proper earlier than the beginning of 2019, John reached out to his plan and altered his deferral share to 100% of his wage.

 Notably, since every of John’s paychecks are for $35,000, at a 100% contribution price, John will totally fund his most 401(okay) wage deferral of $25,000 after his first paycheck! In a vacuum, this sounds nice.

But we don’t plan in a vacuum. We plan in actuality! And in actuality, what occurs is that this…

John’s employer will have a look at his $35,000 paycheck and match 5% of that quantity, or $1,750. And that might be complete quantity of matching contributions that John will obtain for the yr. Since he is not going to be deferring any extra of his future 2019 wage to his 401(okay) – as a result of he can’t, as he’s already deferred the utmost quantity – his employer is not going to make any additional matching contributions for the yr.

Pretty awful, huh?

Consider that 5% of the utmost $280,000 of compensation that may be thought-about in 2019 for the aim of calculating John’s match yields a most match of $14,000. That’s a far cry from the $1,750 that John will get for the yr. Put in a different way, John’s zeal to fund his account as early as potential value him $12,250 in missed “free money” employer matching contributions.

Planning To Avoid Missing Out On Matching Contributions

Missing out on a major employer matching contribution since you have been too desperate to fund your retirement account could be a robust tablet to swallow, and albeit, doesn’t appear very reasonable. That’s why some plans incorporate one thing generally known as a “true-up” provision.

In plans with a true-up provision, the plan will assessment contributions on the finish of the yr and deal with them as if they have been made all year long. Thus, for people like John, from our instance above, early-in-the-year-front-loaded deferrals received’t completely lead to misplaced matching contributions, however relatively, only a delay in receiving them.

The “true-up” provision, nonetheless, is an optionally available characteristic of a plan, and as you would possibly surmise, many plans don’t embody it (it’s, in any case, a approach for the employer to doubtlessly save making some matching contributions, decreasing their value of the plan). Thus, in such conditions, it’s vital to make sure that you are taking correct planning to keep away from the undesirable lack of matching contributions.

The best strategy to keep away from falling “victim” to the deferring-too-much-too-soon lure is to easily decelerate your price of deferral. For occasion, as an alternative of contributing 100% of his wage, John, from our instance, might have opted to solely defer $1,500 from every of his checks into his 401(okay) plan. With 24 complete checks for the yr, that will have nonetheless been greater than sufficient to “max out” his $25,000 of allowed wage deferral, however it could have additionally been gradual sufficient to permit him to obtain the utmost employer match of $14,000 for the yr.


We’re nonetheless within the early levels of the yr, so now is a superb time to verify your wage deferral price and your plan’s phrases to ensure you don’t miss out on any potential employer matching contributions.

Was the “John” instance a bit excessive? Yes, however by taking a look at an excessive instance, it’s simpler to see the potential affect that contributing an excessive amount of, too quickly, can have in your retirement financial savings. Our instance value John greater than $12,000 of “free money” employer matching contributions, and certain, your state of affairs will not be as excessive… however how a lot employer cash are you prepared to go up earlier than you suppose it’s “too much?”

My guess, is “not much.”

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