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

8 MIN READEditorial Policy

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.

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 ($23,000 in 2024, or $30,500 for those aged 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?

Technically, yes. In the 2022 edition of its How America Saves report, Vanguard analyzed 1,700 defined contribution retirement plans (mostly 401(k) plans) representing a total of 5 million participants and found that just 14% of plan holders saved the statutory maximum contribution, up from 12% in the previous year.

While it’s true that 77% of those maximizing their contributions had annual incomes of at least $100,000, the remainder had annual incomes under $100,000.

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.

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 participants 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 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.

So, when is the right time to load up my 401(k)?

“Buy low and sell high.” Yes, we think the old chestnut is good advice, and it applies to investing in your 401(k) as well. However, we believe that trying to time the market is a fool’s errand. There’s really no “right time” to jump into the market.

The lesson we can take away from the Oracle of Omaha is that 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.

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.

Consider a Human Interest 401(k)

Your 401(k) should be a long-term investment. It’s typically the time in the market that matters most, not the perfect entry point. 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.

We 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.

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