MAXING OUT EARLY CAN COST YOU!
Feb 11 '00 (Updated Feb 20 '00)
If you currently or ever plan to make over $70,000/year and have a 401k plan (with employer match) available to you, YOU SHOULD READ THIS REVIEW. It could save you thousands of dollars!
Before we begin, note the following assumption: Annual salary (or $/year) = Total before tax income including bonuses, O/T, rate increases, etc.
1. If you will currently make less than 70,000 this year, you should (provided you can afford it) be withholding the maximum allowed by your plan (I assume 15%). This will maximize your 401k withholding regardless of the employer match and minimize your taxable income. It will also help you build a retirement nest egg on a tax deferred basis.
2. If you currently make more than $70,000 and your employer matches a portion of your contribution, you should consider calculating your optimum withholding rate. The reason is, that the IRS limits your single
year withholding (in 2000 the limit is $10,500, but increases each year). This means that if you make exactly $70,000 this year, and you withhold the maximum (15%), you will precisely hit the maximum for 401k contribution at the end of the calendar year. The thing to note here is that once you "max out" (withhold the maximum allowed in a given year) your employee portion, the employer match will stop! Thus, if you will make more than $70,000 this year, you will max out your contribution prior to the end of the year (a bad thing). Confused? Look at the following two examples:
Example A. Joe earns $100,000 ($8,333.33/mo.) and his employer matches the first 5% of his salary contributed to the company's 401k plan. Let's assume Joe withholds the 15% maximum making his monthly 401k employee contribution $1,250 and the employer portion $416.67. Joe will max out his 401k when his annual employee portion = $10,500 which will be in mid August (10,500/1,250 = 8.4 mo.). Because his employer match will stop when he maxes out, you multiply the monthly employer match times the 8.4 mo. (416.67*8.4 = $3,500). Then add together the annual employee and employer amounts to get Joe's total 401k contribution. 10,500+3,500=$14,000 Total Contribution.
Example B. Joe still earns 100,000 and the match is the same. This time though, he only withholds only 11% ($916.67/mo. employee and still $416.67/mo. employer based on our assumption of matching the first 5%) . He'll max out in mid November (10,500/916.67 = 11.45 mo.) and get to keep all the employer match portions until he hits his max contribution (416.67*11.45mo.=$4,771 ). Thus, making his total contributions = $10,500 employee + $4,771 = 15,271. A full $1,271 MORE than if he contributed 15%!
The difference will not be as dramatic if your employer doesn't match 5%, but you should still go through the exercise to ensure yourself the most money possible. Keep in mind that if possible, you ALWAYS want to max out your 401k contribution. This exercise will just help you to do it as late in the year as possible.
 |
|
|
|
|
|
|
Epinions.com ID:
Almighty
|
 - Top 1000 |
|
Location: Nashville, TN
Reviews written: 198
Trusted by: 593 members
|
|
|
© 1999-2009 Shopping.com, Inc.