So my company just sent out a note saying that our 401K match is changing from 7% to 3% effective in March. I have a bonus coming in February and am thinking that I can up my contribution rate so that I hit the 7% prior to the policy changing. I just want to make sure my thinking on this is correct. If I make $100K per year, a 7% match means that they will match my first $7000 in contributions. If I have already contributed $2K, I would need to contribute another $5K to receive the full match. Is this correct?
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401K Match Question
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Yes, but I would ask if you have enough time to do it. Let's say your bonus this year will be $5,000. You would need to be able to increase your 401k contribution rate to 100% in order to get it in. Some companies allow that, some don't.
Also at least at my company it takes 15-30 days for the contribution rate change to go into effect.Last edited by sweeps; 02-06-2009, 10:21 AM. Reason: This is incorrect -- please see correction below.
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My company allows you to contribute up to 50% per pay period. Bonus and paycheck for Feb 20 should be about $20K. I did the math and 35% would take me to the 7% match. I'm not sure how long it takes to go into effect...that's a good point. I thought the last few times I modified the contribution rate it only took a few days.
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7% match means if you put in 7% or more of your income in the 401K, company will also put in 7% of your income. so if you made 50K the match would be 3500 and if you make 200K, the match would be 14K. the match is calculated when you get paid and put in at the same time as your contributions. so if you have a variable income the match amount contributed for each pay period would change paycheck to paycheck based on how much you earned for pay period.
there is a provision in some 401K plans that is called true-up calculation. this is for people who send send a lot of money early or late in year and then make less than the match contribution at other time of the year. what is does is make sure you get the full match as along as you contribute enough in the year for the full match. this true-up can calculated over various length of time, like yearly, quarterly, month,...
example: true-up applied over a year.
let's suppose that you make 100K and the match is 7% all year long. then you put 12%(6K) of pay in 401K in the first 6 months and make no contributions for the rest of year. the company match over the first 6 months would be 3500 because you were paid 50K in the first half of year and 7% of 50K is 3500. at the end of the year the company would make a matching contribution of 2500 because you contributed enough (6K) to get a match of 6K but the company was short paying you the match by 2500.
now I not sure what is your plan's rules are. but my guess is that the most match you can recieve is 7% of whatever you earn between begining of the year and march plus 3% of what you earn for the rest of the year. if my guess is correct, then to maximize your match you need to contribute a minimum 7% of income between the jan 1 and march by match and contribute a minimum of 3% of income between april and dec 31 after march and before dec 31. because the true-up would apply separately on the two sections of time assuming you have a true-up rule.
but on the other hand it might be possible that if you made all your contributions for the year before the change that you would get the full 7% for the year(some match now and the rest an the end of the year because of the true-up)
I would talk to the point of contact for the 401K plan to see what would happen.
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Originally posted by JinCOSo you are saying it doesn't matter how much I contribute for this specific pay period because the match will be $1400 based on income in this pay period?
Now I guess I should hedge that a bit. I've heard a few others on this site talk about bulk matching in their 401k plan. Meaning you don't get a match each month; instead the company matches at the end of the year. But I'm guessing this is not your case based on how you've presented the question. And even if it were the case, the company would have to do a weighted average between 2 months @ 7% and 10 months @ 3%. Sorry I'm rambling...
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Thanks for the responses...too bad the answers weren't exactly what I was hoping for. I was hoping to somehow game the system and still get the 7% match, but it sounds like it will be some sort of a weighted average (7% for 2 months and 3% for 10 months) as long as I contribute up to the match percentage. I'm still planning on maxing it out by the end of the year because of my tax rate. I guess I shouldn't complain, a 3% match is better than no match!
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Just so we're on the same page, there are two basic factors we need to look at:
1. The percentage of your annual gross that the employer is willing to match.
2. The dollar amount the employer is willing to match for every dollar you contribute within #1.
#2 is sometimes expressed in percentages as well, but it is unnecessarily confusing so I personally never do it....
For example, my employer is willing to give a $0.40 per dollar match for up to 7% of my annual gross. In other words, if I made $100,000 per year (I wish), up to $7000 of my money in the 401k will get $0.40 extra per dollar match from the employer, or up to $2800 total.
To be clear, even if I put in $16,500 (the IRS limit) into my 401k, the maximum my employer will match is still $2800.
As for gaming the system... perhaps you can! If you can crank up your contribution to as much as 7% of your annual gross into the 401k BEFORE the March deadline... you MIGHT get that full 7% match. After that, it obviously stops when you hit the 3% limit. I think that's what you're trying to tell us based on what your employer is trying to tell you.Of course, I'd double check, but if so, you just MIGHT be able to capture more than 3% this year.
Last edited by Broken Arrow; 02-06-2009, 11:01 AM.
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BA - Our match is currently set to 100% of 7% and will change to 100% of 3%.
My original plan was to contribute 7% of my income (around $7K) to 401K prior to March, which would be matched at $7k from my employer. When I look at my transaction report from last year, the match spikes up when I received bonuses so I was thinking it was related to how much I'm contributing in a specific period. I have it set to 35% for the 2/20 pay check so we'll see what happens.
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Typically it is matched at the time your contribution is made (on payday, bonus day...).
FWIW Standard rule of thumb as to prioritization:
#1 Contribute to employer sponsored plan (401k, 403b etc) up to extent the employer matches - otherwise you're leaving money on the table.
#2 Contribute to ROTH up to max
#3 Contribute to employer sponsored plan up to max
#4 Contribute to taxable investments
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