When it comes to saving for retirement, investing as early as possible is key in order to maximize growth over time. One common way individuals save for retirement is through their 401(k) plan. However, it is crucial to be aware of how maxing out your 401(k) too early in the year can result in potential losses, unless the plan offers a special feature known as a true-up.
Most 401(k) plans provide an employer match, where the employer contributes extra money to the account based on the employee’s deferrals. To receive the full employer match for the year, employees are typically required to contribute a certain percentage of their income each paycheck. However, not all plans offer a true-up feature.
A true-up feature in a 401(k) plan provides an additional deposit of the remaining employer match for employees who max out their contributions early in the year. This feature is not offered in all plans, but it can be extremely beneficial for employees. According to a recent survey, about 67% of plans that offer matches more than annually included a true-up feature in 2022.
Without a true-up feature, employees may miss out on part of the company match if they max out their 401(k) contributions early. For example, if you reach the employee deferral limit before the end of the year, you could miss out on thousands of dollars in employer match contributions, impacting your future growth potential.
To avoid missing out on employer match contributions, it is important to evenly spread out your 401(k) contributions throughout the year. This will ensure that you receive the maximum match from your employer. It is also essential to monitor any changes in your income, such as raises or bonuses, that may impact your contribution strategy.
Before setting your 401(k) deferrals, it is crucial to understand whether your plan includes a true-up feature. This information can typically be found in the “contributions” section of your 401(k) summary plan description. If unsure, you can always confirm with your company’s human resources department to clarify whether a true-up feature is available.
Having a solid understanding of the true-up feature in your 401(k) plan is vital for maximizing your retirement savings potential. By being aware of this feature and adjusting your contribution strategy accordingly, you can ensure that you are making the most of your employer match contributions and setting yourself up for a secure financial future.
Leave a Reply