Key Takeaways
It may not be beneficial to maximize your 401(k) contributions as quickly as possible if it has an employer match feature.
Matching contributions from your employer may be calculated and funded each pay period.
It’s often time in the market that often matters most—not the perfect entry point.
For some 401(k) plan holders, maximizing contributions as early as possible in the year might seem like a responsible financial decision. More people are maximizing their contributions. According to Vanguard’s 2023 How America Saves report, 16% of defined-contribution retirement plan participants contributed the statutory maximum to their 401(k) plans (up from 14% in 2022).
Additionally, the limit to how much you can contribute per year is quite high (see below for latest IRS contribution limits).
| 2024 | 2025 | |
|---|---|---|
| Pre-tax and Roth employee contributions | $23,000 | $23,500 |
| Catch-up contributions (50+ years old) | $7,500 | $7,500 |
| Total pre-tax and Roth employee contributions (50+ years old) | $30,500 | $31,000 |
| Catch-up contributions (60-63 years old) | N/A | $11,250 |
| Total pre-tax and Roth employee contributions (60-63 years old) | N/A | $34,750 |
So, you might be asking why not just get it done in one go? In this article, we’ll analyze whether or not it makes sense to max out your 401(k) at the beginning of the year.
Should you max out your 401(k)?
Why are more people maximizing their contributions? Besides the fact that the earlier you start, the better the chance you have to hit a $1 million nest egg, socking away as much as you can in your 401(k) can provide several tax advantages.
For example, those making under $49,999 per year are 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 participants reducing their taxable income, but also they’re reducing their tax liability.
Even though maximizing your 401(k) early can get you closer to your retirement savings goals, it might actually impede you from earning additional money from an employer match.
Employer match can help you save more for retirement
The main reason you may not want to maximize your 401(k) too quickly is that you’re most likely getting a matching contribution from your employer that is calculated and funded each pay period. The Vanguard study found that 96% of plans provide employer contributions.
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 to contribute 28.2% ($1,875.00) every month to complete the total of $23,000. Each pay period, your employer would contribute $0.50 for every dollar up to 6% of your salary ($200), for an annual total of $2,400.
Scenario #2: But what if you were to contribute more than 23.75% per month? Let’s assume that your financial situation allows you to contribute a 50% deferral every month. If you were to do that, then you would contribute $3,333.33 every month and max out your contributions in about 6.75 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 $1,350 ($200 per month x 6.75 months to maximize early) in matching contributions for the year.
By maximizing your 401(k) early in scenario #2, you would be saying goodbye to an extra $1,050 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 maximum matching benefit from your employer.
Maximize your 401(k) match
Racing to max out your 401(k) early? You might want to think twice. Most employer matches are calculated per paycheck—which means maxing out too quickly could mean leaving free money on the table. Pace your contributions throughout the year to get your full match.
When is the right time to max out my 401(k)?
You might want to consider refraining from maxing out your 401(k) if you are in significant debt or if you have immediate financial needs. And according to Ronnie Cox, Investment Director at Human Interest Advisors, as a rule of thumb you should consider contributing between 10% to 15% of your annual income to your account. That means to max out your 401(k), you generally need to be making a high enough income to afford maxing it out. Additionally, it doesn’t matter so much when you invest so much as how you do it because the market is always changing. No matter when you decide to invest, there will always be some risk involved.
Therefore, as long as you are consistently contributing to your 401(k), you may be more likely to benefit from the effects of compound growth. The more your funds are compounded, the more likely your nest egg can increase due to compound interest.
What about market volatility?
Market volatility is usually at its worst before, during, and right after a recession. While we believe a recession shouldn’t prevent you from opening a 401(k) or cause you to pull investments from an active one, there are moves you can make to help weather the economic changes:
Explore a variety of investment options to help diversify your portfolio.*
Take stock of your current portfolio and rebalance your holdings, if needed.**
Consider keeping some cash on hand to help buffer you from financial uncertainty.
* Diversification does not assure a profit or protect against loss.
**Portfolio rebalancing does not assure a profit or protection against loss.
When should I avoid maxing out my 401(k)?
There are many considerations to take into account when deciding to max out your 401(k). First, it’s important to assess your retirement goals. If you are further behind on your retirement goals, it doesn’t necessarily mean you have to immediately start maxing out your 401(k), but it may mean that you will at some point need to increase your contribution amount. Next is looking at your current financial obligations (like high-interest debt and essential expenses) and immediate financial priorities (such as saving for a home or education). If you are still getting out of debt, or perhaps you don’t have enough money to achieve other financial goals you’ve prioritized, it may not be the best financial decision to max out your contribution limit.
Consider a Human Interest 401(k)
It’s never too early to set up a 401(k)—but there’s no real benefit in maximizing your contribution as quickly as possible when offered an employer match. By maximizing your 401(k) annual contribution at the beginning of the year, you could miss out on your employer’s maximum matching contribution.
If you feel that your employer could use a hand to improve your current workplace retirement plan or want to set up or switch to a 401(k) that benefits 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.
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The Human Interest TeamWe believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.
