the better scenario.

I plan to max the 401(k) contribution this year. Which is better...to max it within the first six months or spread it over 12 months?

2gs

the better scenario.

I plan to max the 401(k) contribution this year. Which is better...to max it within the first six months or spread it over 12 months?

2gs

Assuming that you believe that you can't know what the market will do, odds are that your return will be greater if you invest it in six months rather than 12 months. However, spreading it over 12 months is slightly less risky.

My personal recommendation is to invest your money as soon as it's available. If you make a habit of continually doing this rather than holding it back, you will almost certainly be better off in the long run.

Another consideration is how the company matches your contributions, if at all. If they wait until year end, it will not matter. However, if they match it each paycheck, then you would miss out on the matching for the last 6 months of the year if you chose to contribute for only the 1st 6 months.

Another twist to this is if you contribute the full amount of $$$ to your 401k each year and get an unexpected bonus at year-end. I max out my contributions every year for the full amount ($13k for 2004). When they occasionally give out a bonus at year end, I don't get the 3% match that my company does each paycheck because I have already hit the contribution limit.

I don't know anyway around this unless I'm forwarned of a bonus coming my way. I don't complain though. I just use the money to fund next years Roth IRA.

decath

MadCapitalist,

Thanks for your reply. On other question...Spreading it over twelve months gives me the advantage of lower taxes per pay period, right?

I get paid once a month and I've read that having the deduction done out of each pay period reduces your taxes. Is there any truth to this?

Sorry for the goofy questions. I am just trying to figure out the best approach.

2gs.

MadCapitalist,

Thanks for your reply. On other question...Spreading it over twelve months gives me the advantage of lower taxes per pay period, right?

The total tax savings would be the same either way you do it. The total tax savings = Contributions for the year X Marginal tax rate.

Spreading it over twelve months would only change the timing of the tax savings, not the amount.

THANKS!!!

I concur with Decath that you should know exactly how your company 'matches'. I made the mistake one year and did the full contribution over the first six months and missed out on half of my company's match! Be careful!

Also, by contributing over 12 months, the advantages of dollar cost averaging come into play, as well as more take-home dollars each paycheck (if that matters to you).

Put that extra cash in the first six months into a Roth if you qualify.

2old