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|Subject: 401-k & Employer Matching||Date: 3/20/2000 2:04 PM|
|Author: txbuckeye||Number: 20291 of 74536|
Not sure if this is the correct forum for this, but I bet someone who frequents this knows the answer. It has to do with the way employer matching works with 401-ks. My basic question is this: If an employer makes matching contributions up to a certain percentage of pay contributed to a 401-k, can an individual miss out on matching funds by hitting the IRS maximum contribution early?
Consider this example (using the 1999 maximum of 10,000 and some easy round numbers):
Person X makes 10,000 per month and decides to contribute 10% to a 401-k. The company matches 50 cents on the dollar up to the first 6%. So basically, each month, the person contributes $1,000 and the company matches with $300 (50% of 6% of 10,000). After 10 months, person X hits the annual maximum of $10000 and can no longer contribute. End result for year: $10,000 of his money and $3,000 of the company's money for a total of $13,000 saved.
Now let's say person X decided he wanted to get in the habit of saving more so decided to contribute 20% of his pay to the 401-k with the intention of saving the $2,000/month via other means even after he hit the annual maximum. In this case, he contributes $2,000 per month and the company still contributes only $300. After 5 months, he hits the maximum, having contributed $10,000 while the company has only matched at $1,500. End result for the year is 11,500 instead of 13,000.
What is wrong with this logic? Should you try to hit the yearly maximum as close to the end of the year as possible?
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