How Much is Too Much?
The idea of contributing too much to a company retirement plan may sound strange, but it can happen, especially if an employee contributes high amounts in a short time frame, thereby hitting the annual contribution limit too early and missing out on part of the employer's 401(k) match, rather than spreading contributions out during the year.
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For 2014 the annual 401(k) contribution limit for workers under age 50 is $17,500, and for those age 50 and older it's $23,000. (Matching contributions from the employer don't count toward these caps.) Let's say a 40-year-old worker who makes $100,000 a year contributes 25% of her pay to a 401(k) plan every two weeks starting in January, and that the company matches the first 3% dollar-for-dollar. By contributing at such a high rate, the worker would reach the $17,500 cap on annual contributions sometime in September and wouldn't be able to make any more contributions after that.
Up to that point the worker would have had $2,192 added to her 401(k) through her employer match. But by contributing at a lower rate each pay period (17.5% of pay, to be exact) and spreading her contributions out more evenly throughout the full calendar year, the worker would receive a full year's worth of the employer match: $3,000. By contributing too much too soon, the worker has cost herself more than $800 in eligible retirement money from her employer.
Plan Ahead
It's well worth planning ahead so as not to miss out on matches later in the year. Saving a lot in your 401(k) is a good thing, but when you save it may be nearly as important.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.