When it comes to saving for retirement, investing sooner rather than later is typically the best strategy to maximize growth over time. However, there is a potential downside to maxing out your 401(k) too early in the year, which could ultimately cost you money in the long run. This is especially true unless your plan has a special feature known as a “true-up.”
Understanding Employer Matches and True-Ups
Most 401(k) plans offer an employer match, where your employer deposits extra money into your account based on your deferrals. In order to receive the full employer match for the year, you are usually required to contribute a certain percentage of your income each paycheck. However, some plans offer a “true-up,” which provides an additional deposit of the remaining employer match for employees who max out their contributions before the end of the year.
“It’s an awesome perk, but not all 401(k) plans offer a true-up,” explained Tommy Lucas, a certified financial planner. According to the Plan Sponsor Council of America’s latest annual survey, about 67% of plans that offer matches more than annually had a true-up in 2022. True-up features are typically more common in larger plans, experts say.
The Risks of Missing Out on Employer Match
When a 401(k) plan does not have a true-up, employees run the risk of missing out on part of the company match. For example, if you max out your contributions early in the year without a true-up feature, you could miss out on a significant portion of your employer match, potentially costing you thousands in future growth.
To avoid missing out on employer match contributions, experts recommend equally spreading out your contributions throughout the year. It is also important to monitor changes in your income, such as raises or bonuses, to adjust your contributions accordingly. Before setting your 401(k) deferrals, it is crucial to know whether your plan has a true-up feature to ensure you are maximizing your retirement savings.
One effective way to determine if your 401(k) plan has a true-up feature is to review the “contributions” section of your plan’s summary plan description. While it may not explicitly state whether a true-up is available, you can always reach out to your company’s human resources department for clarification. This proactive approach may even prompt your company to consider adding a true-up feature in the future to benefit employees.
While investing in your 401(k) early is generally a smart move, it is essential to understand the potential drawbacks of maxing out your contributions too soon. By being aware of your plan’s features, such as a true-up, and strategically managing your contributions throughout the year, you can ensure that you are making the most of your retirement savings opportunities.