Maximize employer 401k match

If you contributed the maximum 401k this year ($18,000 for those of us under 50) congratulate yourself!  You are on your way to a nice retirement and you’re doing your part to be financially prepared.

But then stop celebrating and ask yourself:  Did I get the maximum employer match?

You are allowed to contribute $18,000 a year but your employer can contribute more for you.  If you are fortunate enough to work for an employer that matches your 401k with some percentage you need to play a tricky game to maximize their match.

For example,

Suppose I work for a company that matches 100% of every 4.5% I contribute.  So if you earn $5,000 every paycheck, if you contribute 15% of that paycheck then in 24 pay periods you would pay $18,000 at the end of the year.  Meanwhile your employer would pay $5,400 for you.  This is good because they then pay that $225 to you every pay period.

But now let’s suppose you instead decided to do 16% every month.  If you do this there will be one pay period in which you will not be able to contribute to the 401k and your employer will not match.  So you missed $225 of free 401k money by holding on to too much.

This is spectacularly a rich persons problem.  After all, saving 15% every month in 401k is not easy, even for somebody making $120,000 a year.  But if you are making more than that, then the problem becomes more pronounced as you might have 4 or 5 pay periods in which you are ineligible to contribute to the 401k plan.  In this case, you may consider lowering your 401k contributions so that your employer matches every pay period.

The last question about this strategy is how it effects your taxes.  I would argue it really doesn’t.  Since you can only contribute up to $18,000 then at the end its a wash.