When it comes to saving for retirement, it is crucial to understand the implications of maxing out your 401(k) too early in the year. While investing sooner typically boosts growth over time, you could potentially lose money by reaching the maximum contribution limit too soon. Most 401(k) plans offer an employer match, which adds extra funds to your account based on your deferrals. However, if you max out your contributions before the end of the year, you might miss out on part of the employer match unless the plan includes a special true-up feature.

Understanding True-Up Features

A true-up feature in a 401(k) plan is an additional deposit of the remaining employer match for employees who have maxed out their contributions early in the year. Not all plans offer this benefit, but it can be a significant advantage for those who do. According to a survey by the Plan Sponsor Council of America, roughly 67% of plans that offer matches more than annually had a true-up in 2022. It is more common in larger plans, experts suggest.

Financial planners emphasize the importance of knowing whether your 401(k) plan has a true-up feature before setting your deferrals. Without a true-up, missing out on part of the employer match can have significant long-term consequences. For example, if you max out your plan early and miss out on $4,200 of your remaining employer match, that missed amount could potentially equate to tens of thousands of dollars in future growth.

To prevent missing out on part of your employer match, it is recommended to evenly spread out your contributions throughout the year. However, it is essential to monitor any changes in your income, such as raises or bonuses, to ensure that you are maximizing your contributions without reaching the limit too early. Checking your 401(k) summary plan description for information on the true-up feature is a good starting point, as it may indicate whether or not the plan includes this benefit.

Financial advisors stress the importance of understanding the specific features of your 401(k) plan to optimize your retirement savings. Consulting with a certified financial planner or your company’s human resources department can help clarify any questions you may have about the true-up feature. By staying informed and making informed decisions about your 401(k) contributions, you can ensure that you are maximizing your retirement savings potential.

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