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Is It a Good Idea to Front-load 401(k) Contributions?

A reader writes in, asking:

“On dollar cost averaging, if you can frontload your entire max 401(k) contribution to the first half of the year, is there a reason not to? It seems like you’d give it more time to do its compound interest thing, and in general the market trend is up over time.”

In many cases, yes, it makes great sense to max out your 401(k) contributions as early in the year as possible, in order to get the money invested as early as possible. (Ditto with IRA contributions, for the same reason.)

In some cases, however, doing so can cause you to miss out on part of the employer matching contribution — if your employer offers one. It all depends on how the plan actually calculates the matching contribution each pay period.

For example, consider three different hypothetical 401(k) plans, each of which could be described as having a “dollar for dollar match, up to 4% of compensation.”

With Plan A, the employer matches every dollar you’ve put in, until you hit 4% of your annual compensation. So by front-loading, you get your maximum match, and you get it early in the year. Great!

With Plan B, each pay period, the employer will contribute up to 4% of your compensation for that pay period, as long as you have contributed an equal amount already in the year. So by front-loading you get your own money invested as soon as possible, and you still get the maximum match, but it doesn’t speed up the rate at which you get the matching contribution (i.e., you still only get 4% per pay period). Still, front-loading is probably a good idea, if you can do it.

With Plan C, each pay period, the employer will contribute up to 4% of your compensation for that pay period, as long as you contributed an equal amount in that pay period. In this case, if you front-load your contribution, you actually end up missing out on part of the match. For example, if you max out the 401(k) in the first quarter of the year, you would not get any matching contribution in the final three quarters, because you didn’t contribute anything in those pay periods. In other words, you’d miss out on 3/4 of your total possible maximum match.

So, in short, it’s important to have a discussion with the plan administrator about how exactly the matching contribution is calculated (if there is one). Or, if you really want to be sure, get a hold of the plan document and read for yourself how the matching contribution is calculated.

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