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Should you max out your 401(k) at the beginning of the year?

By The Human Interest Team

One of the most well-known phrases in investing comes from Warren Buffett, a.k.a. “The Oracle of Omaha”: “Someone’s sitting in the shade today because someone planted a tree a long time ago.”

Using the principle of maximizing time in the market, some 401(k) plan holders could consider maximizing their contributions as early as possible in the year. After all, there is a limit as to how much you can contribute per year ($19,000 in 2019, or $25,000 for those age 50 and up). So, why not just get it done? Let’s analyze whether or not it makes sense to max out your 401(k) at the beginning of the year.

Wait, are people even maximizing their 401(k) plans at all?

Yes! In the most recent edition of its How America Saves (2018) report, Vanguard analyzed 1,900 defined contribution retirement plans (mostly 401(k) plans) representing a total of 5 million participants and found that 13% of plan holders saved the statutory maximum contribution, up from 10% in the previous year.

While it’s true that 86% of those maximizing their contributions had annual incomes of at least $100,000, the remaining 14% had annual incomes under $100,000. Three percent of those maximizing their 401(k) contributions made under $49,999 per year. 

Why are more people maximizing their contributions? Besides the fact that the earlier that you start, the easier it is to hit a $1 million nest egg, socking away as much as you can in your 401(k) provides several tax advantages. Let’s take those making under $49,999 per year as an example: they’re most likely eligible for the Retirement Savings Contributions Credit which provides a tax credit of up to 50% on 401(k) contributions! Not only are those plan holders reducing their taxable income but also they’re reducing their tax liability.

Ok, so should I maximize my 401(k) contributions as soon as possible?

With a never-ending list of financial goals (saving for college, paying down high-interest credit card debt, etc.), it sounds sensible to cross off maximizing your 401(k) right away. The reality is, however, that doing so isn’t necessarily right for everyone.

The main reason you shouldn’t maximize your 401(k) too quickly is that you’re most likely getting a matching contribution from your employer. The Vanguard study found that 95% of plans provide employer contributions, up from 91% in 2013.

Let’s assume that you’re making $80,000 per year and that your 401(k) employer match is $0.50 for every dollar up to 6% of your salary. That means that your maximum employer match is $2,400. Let’s run two scenarios:
  • Scenario #1: To max out your contributions in equal amounts throughout the year, you would need contribute 23.75% (or about $1,583.33) every month to complete the total $19,000. Each pay period your employer would contribute its $0.50 for every dollar up to 6% of your salary, for a total of $2,400.
  • Scenario #2: But what if you were to contribute more than 23.75% per month? Let’s assume that your 401(k) allows you to contribute 50% every month. If you were to do that, then you would contribute $3,333.33 every month and max out your contributions in about 5.7 months. Since your employer only contributes up to 6% of your gross pay or about $200 per month, you’ll only receive a total of $1,140 ($200 per month x 5.7 months to maximize early) in matching contributions.
By maximizing your 401(k) early in scenario #2, you would be saying goodbye to an extra $1,260 in employer matching contributions that year! While there may be some plans out there that offer a makeup contribution in case of front-loading, it’s safe to assume that it’s a very small number of 401(k) plans. In fact, it’s such a small number that the Vanguard study surveying 5 million plan holders doesn’t even mention such a clause. Overall, you should max out your contributions every year if you can do so while getting the whole match. 

Fair enough, but when is the right time to load up my 401(k)?

“Buy low and sell high.” Yes, the old chestnut is good advice, and it applies to investing in your 401(k) as well.

However, trying to time the market is a fool’s errand. There’s really no “right time” to jump into the market. Everybody loves reading the headlines about the super star investment managers, like Warren Buffett, Peter Lynch, and others. However, the fact is that only 20% to 35% actively managed funds beat the benchmark for their category. And that’s a minority of the pros who do it for a living!

It’s a humbling reality for anybody trying to beat the market.

Even the Oracle of Omaha believes that investing in passively-managed funds yields better results in the long term than funds from most investors with high-fee managers. And that’s what you should be aiming for with retirement savings: the results at the end of decades of saving. In his 2013 letter to Berkshire Hathaway shareholders, Buffett revealed that his will advises his trustee to allocate 10% of the cash in short-term government bonds and 90% in a very-low cost S&P 500 index fund. 


Your guiding principle should be remembering that a 401(k) is a long term investment: it’s time in the market that matters most, not the perfect entry point. It’s never too early to setup a 401(k), but there’s no real benefit in maximizing your contribution as quickly as possible when your 401(k) has an employer match feature. By maximizing your 401(k) annual contribution at the beginning of the year, you would miss on your total employer match.

If you feel that your employer could use a hand improving your current workplace retirement plan or want to set up or switch to a 401(k) that’s great for employees and employers, let your company know about Human Interest. We’re a 401(k) administrator with expertise in flexible plan design and options, including eligibility, matching contributions, vesting, and profit-sharing. Schedule a time to chat, and feel free to ask us anything.  

Check out our free, online resources to learn more about 401(k)s for you and your company.