401k and maxing out

Recently I had a conversation with someone who switched from being a contractor to full-time employee. He does not max his contribution, just puts enough to get employer's match. He says that otherwise he doesn't see any money in bank.

This is the case with most people. Contribute to 401k based on your comfort level. Don't miss free cash from employer match.

401k and Federal Government

If you have been following the news, you would hear about federal government trying to protect banks and fund managers charging hefty fees as part of 401k mutual funds. In some scenario, it may be necessary, but it is not really warranted.

What is really needed from government is a change in regulation to allow people to invest their own money in the manner they feel it is appropriate (e.g. buying any stock from SNP 500 or top 100 bonds on top of standard offering). If such choice is available, many of them will be able to move from funds to stocks or bonds.

Consider bonus amount in 401k

At the time of calculating your 401k contribution,  please consider your bonus and other payroll incomes too.  Sometimes companies do convert some of that into 401k contributions (good for you) but you may reach your yearly goal faster than you needed to.

As an example: 

If you are making $1,00,000 and planning to maximize your 401k contribution for year 2015, you would need to contribute 18%. 

Let's say if you have a variable bonus of $20,000. That actually bumps up the amount you earn to $1,20,000, which means you need to bring down your contribution to 15%. 

If you keep your contribution at 18%, you are likely to reach that in 10 months - with no contribution from your paycheck in last two months (and likely, no contribution from your employer, unless they do a true match).

Let's review Employer Match - part III

In yesterday's post, we reviewed how Employer Match works in best scenario.

For some of you, there may be a requirement that you need to contribute in each of the paycheck to get an employer match in that month. What would mean is that if you don't contribute to 401k for a given pay check, there may not be any contribution by employer in that pay check.

This may occur if you try to allocate higher percentage to your 401k or if you try to "front-load" 401k in the months where you get higher income.

Scenario:

If you are earning $1,00,000, and contributing 20% a month to 401k, you will be putting in $833 a month. If your employer has 50% of employee match upto first 6%, it would mean that employer will add $125 a month.

For year 2015, max limit for a regular employee to contribute is $18000. As per the contribution table below, that limit will be reached by 11/30/2015, causing no contribution by employee in December 2015 and hence causing no contribution by employer as well. Essentially losing $250 of employer contribution.

Date	Paycheck	Employee contribution	Employer Match
1/15/2015	$4,166.67	$833.33	$125.00
1/31/2015	$4,166.67	$833.33	$125.00
2/15/2015	$4,166.67	$833.33	$125.00
2/28/2015	$4,166.67	$833.33	$125.00
3/15/2015	$4,166.67	$833.33	$125.00
3/31/2015	$4,166.67	$833.33	$125.00
4/15/2015	$4,166.67	$833.33	$125.00
4/30/2015	$4,166.67	$833.33	$125.00
5/15/2015	$4,166.67	$833.33	$125.00
5/31/2015	$4,166.67	$833.33	$125.00
6/15/2015	$4,166.67	$833.33	$125.00
6/30/2015	$4,166.67	$833.33	$125.00
7/15/2015	$4,166.67	$833.33	$125.00
7/31/2015	$4,166.67	$833.33	$125.00
8/15/2015	$4,166.67	$833.33	$125.00
8/31/2015	$4,166.67	$833.33	$125.00
9/15/2015	$4,166.66	$833.33	$125.00
9/30/2015	$4,166.66	$833.33	$125.00
10/15/2015	$4,166.66	$833.33	$125.00
10/31/2015	$4,166.66	$833.33	$125.00
11/15/2015	$4,166.66	$833.33	$125.00
11/30/2015	$4,166.66	$500	$125.00
12/15/2015	$4,166.66		$0.00
12/31/2015	$4,166.66		$0.00
Total	$100,000.00	$18,000.00	$2,750.00

Let's review Employer Match - part II

In the link I shared here and there , I touched upon employer match to 401k.

One common match done by employers is 50% of employee match upto first 6%. What it really means is that employer will match 50% of employee's contribution, but they will not contribute more than 3% of the paycheck at any point of time.

How does this play out?

If you are earning $1,00,000, and contributing 18% a month to 401k, you will be putting in $750 a month. If your employer has 50% of employee match upto first 6%, it would mean that employer will add $125 a month - that is $3000 of free money added to your 401k by end of the year.

Date	Paycheck	Employee contribution	Employer Match
1/15/2015	$4,166.67	$750.00	$125.00
1/31/2015	$4,166.67	$750.00	$125.00
2/15/2015	$4,166.67	$750.00	$125.00
2/28/2015	$4,166.67	$750.00	$125.00
3/15/2015	$4,166.67	$750.00	$125.00
3/31/2015	$4,166.67	$750.00	$125.00
4/15/2015	$4,166.67	$750.00	$125.00
4/30/2015	$4,166.67	$750.00	$125.00
5/15/2015	$4,166.67	$750.00	$125.00
5/31/2015	$4,166.67	$750.00	$125.00
6/15/2015	$4,166.67	$750.00	$125.00
6/30/2015	$4,166.67	$750.00	$125.00
7/15/2015	$4,166.67	$750.00	$125.00
7/31/2015	$4,166.67	$750.00	$125.00
8/15/2015	$4,166.67	$750.00	$125.00
8/31/2015	$4,166.67	$750.00	$125.00
9/15/2015	$4,166.66	$750.00	$125.00
9/30/2015	$4,166.66	$750.00	$125.00
10/15/2015	$4,166.66	$750.00	$125.00
10/31/2015	$4,166.66	$750.00	$125.00
11/15/2015	$4,166.66	$750.00	$125.00
11/30/2015	$4,166.66	$750.00	$125.00
12/15/2015	$4,166.66	$750.00	$125.00
12/31/2015	$4,166.66	$750.00	$125.00
Total	$100,000.00	$18,000.00	$3,000.00

To maximize, you may need to add at least 6% to your 401k every month (that's how most plans are typically set up, please check with your company as well as your plan administrator) to be sure. If they do what is called as "true-match", you are one of the lucky ones.

401k mistakes

Here is an interesting article from Forbes related to 401k. http://www.forbes.com/sites/ashleaebeling/2012/01/13/the-big-401k-match-mistake/

The article is slightly outdated in terms of limits it describes for 401k, but some of the content is still relevant for today.

Employer Match for 401k

Employer Match for 401k

What is Employer Match?

Some employers match part or all of employee contribution to 401k to encourage retirement savings. This is an attractive benefit offered by employers. Employer contribution does not count towards $18,000 contribution limit for year 2015. But it does have its own separate limits. 

How does this work? 

Let's say, you will earn $100,000 as your annual salary for year 2015. In order for you to reach maximum employee contribution of $18,000, you will need to contribute at 18% to your 401k. Your employer has a 100% match to employee contribution (if you contribute 18%, your employer will contribute 18% as well).

Salary	$100,000.00
401K Contribution in percentage	18%
401K Contribution in amount	$18,000.00
Maximum Allowed for Employee Contribution for 2015	$18,000.00
Net Contribution to 401k by Employee	$18,000.00
Amount per paycheck (26 paycheck)	$692.31
Amount per paycheck (24 paycheck)	$750.00
Employer Match percentage	100%
Employer Match in Amount	$18,000.00
Net Addition	$36,000.00

In such scenario, if you contribute $18,000 to your 401k, your employer will contribute $18,000 to it.