Experts: What’s the Best Time of the Year To Max Out a 401(k)?

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There are many ways to save for retirement, but a 401(k) is an especially good investment tool because it grows with market gains, allows for some tax deferment, and employers can contribute to them, too.

Most people make a monthly contribution to their 401(k), but it is also possible to max out a 401(k) early in the year, known as “front-loading.” GOBankingRates spoke with financial experts on which time of the year is best to max out your 401(k).

Benefits of Front-Loading a 401(k)

If you’re in a position to front-load your 401(k), it does have some advantages, according to Adam Garcia, CEO of The Stock Dork. “One significant advantage is the potential for higher long-term growth. This can be particularly advantageous if the market performs well throughout the year, as you would benefit from the full growth potential on your contributions,” he said.

Another benefit of maxing out contributions at the start of the year is the potential to maximize employer matching contributions, he explained. “Many employers offer matching contributions based on a percentage of your salary or a specific contribution amount.” 

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However, there are also some drawbacks to front-loading contributions, Garcia said. One significant disadvantage is the lack of flexibility. “Once you’ve maxed out your contributions, you may not have the option to contribute more until the following year. This can be problematic if unexpected expenses arise or if you come across other investment opportunities that you would like to pursue.”

Another consideration is the impact of market volatility, Garcia said. “If the market experiences a downturn early in the year, your contributions may be subject to potential losses.”

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Spacing Out Your Contributions

Front-loading a 401(k) means coming up with a pretty sizable sum of money early in the year, which could lead to financial cash flow problems. Matt Sampson, CFP®, senior investment advisor with Arnerich Massena advised, “To prevent highly uneven cash flow throughout the year, we normally recommend that clients calculate the per paycheck deferral amount that will get them to the maximum limit by the end of the year, and then contribute regularly throughout the year to reach that maximum.”

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Additionally, he said there are instances in which receiving a company match may be dependent on making a paycheck deferral. “In other words, if you max out early in the year, you could miss out on company matching dollars later in the year. Fortunately, this is plan-specific, and many companies have ‘true up’ policies in place to make employees whole on their match in this situation.”  Employees should check their plan documents or ask their employer about their plan.

And, if you’re a highly compensated employee, and you are not dependent on your paycheck to cover your expenses for a few months, there could be a potential case to make for front loading your 401(k) plan if a severe market correction occurs early in the year, Sampson said.  “In that circumstance, having that money available in your plan means you would have more dollars with which to participate in the eventual recovery.”

Dollar-Cost Averaging

Spacing out contributions evenly throughout the year has its own set of pros and cons, Garcia explained. “One advantage is the benefit of dollar-cost averaging. This strategy can help mitigate the impact of short-term market volatility and potentially reduce the risk of investing a significant sum at an unfavorable time.”

However, spacing out contributions evenly may result in missed opportunities for market gains if the market performs well early in the year, Garcia said. “It also requires discipline and consistency to ensure regular contributions are made. Some individuals may find it challenging to maintain the discipline necessary to consistently contribute throughout the year.”

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Automate Contributions

Many people opt to space out their payments. Alissa Krasner Maizes, founder of Amplify My Wealth, a licensed attorney and registered investment advisor, suggested that people who choose this route set up automated contributions to maximize their 401k for the year. “Before automating your contributions, determine your anticipated yearly expenses to ascertain whether you can afford to max out your 401k contributions and how much you can contribute each month. Additionally, find out from your employer’s human resources representative whether they match your contributions and, if so, what percentage and whether the match can be negatively impacted by frontloading your contributions.”

Consider How Long You’ll Be at Your Job 

Whether you should front-load your contributions also depends on circumstances, such as how long you plan to stay at your job, Krasner Maizes said.

“If you are considering taking a leave from work, leaving your current employer, or prefer bigger paychecks followed by smaller paychecks that account for the contributions, then front loading might make the most sense for you,” she explained.  But, if none of these front-loading reasons resonate with you, dividing your contributions by the remaining paychecks for the year and automating those contributions may be a better approach that allows you to dollar-cost average the same amount of money to be contributed to your 401(k) each pay period capturing the ups and downs of the market. 

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Pay Attention to Your Financial Health

Ultimately, the best time of year to max out your 401(k) will vary depending upon each individual’s financial health, according to Jake Hill, CEO of DebtHammer. “For example, if you’re paying off high-interest debt, reducing your monthly payments to max out your 401(k) early in the year isn’t a smart choice. Similarly, if your emergency savings fund is looking a little empty, beefing up your 401k gradually across the year is a better option. Even if you don’t max out early, you can still ensure you get the most out of your 401(k) contributions by tracking them throughout the year and making adjustments as needed.”

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About the Author

Jordan Rosenfeld is a freelance writer and author of nine books. She holds a B.A. from Sonoma State University and an MFA from Bennington College. Her articles and essays about finances and other topics has appeared in a wide range of publications and clients, including The Atlantic, The Billfold, Good Magazine, GoBanking Rates, Daily Worth, Quartz, Medical Economics, The New York Times, Ozy, Paypal, The Washington Post and for numerous business clients. As someone who had to learn many of her lessons about money the hard way, she enjoys writing about personal finance to empower and educate people on how to make the most of what they have and live a better quality of life.

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