Monday, November 5, 2007

One mistake to avoid while maximizing your 401K

I almost made a major mistake in the process of maximizing my 401K: not properly adjusting my deferral amount for the last quarter of the year. The main advantage of a 401K is the company match which equals to free money. My company matches each dollar I contribute up to 4% of my pay. If I don't contribute, there is no match. Therefore it is crucial to be contributing on all 26 paychecks with each of my 26 contributions being at least 4% of my pay to get the full company match. If I were to reach the $15,500 contribution limit prior to the last paycheck, I would lose out on the company match.

Because I receive compensation pay for working week-ends and for traveling throughout the year, I never know exactly what my end-of-year salary is going to be. Every quarter end I have the opportunity to change my deferral amount. So every quarter I must re-calculate my deferral amount to make sure I will not reach the contribution limit prior to the last paycheck. At the end of September I must calculate my deferral amount one last time to make sure the $15,500 limit is reached on the last paycheck of the year. And I can only estimate how much compensation pay I will receive during the last quarter.

All this could be made real simple if I could specify a fixed amount as a contribution: $15,500/26 is all I need to contribute every paycheck. Alas, my company is making it a bit more interesting by allowing only to specify a percentage of pay as a contribution, and not a fixed amount. I wonder if this is the same for all other 401K plans out there or if it is just one of my company's quirks.

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