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Penalty for “maxing out too early”
Investing in a lump sum, or leveraging large sums of money faster, allows you to make the most of your time in the market. Increase your potential for growthAccording to a Vanguard study published in 2023.
But not all plans offer compensation features, so it's important to understand your 401(k) plan before front-loading contributions, experts say.
About 67% of 401(k) plans that offer more than a year's worth of matches made adjustments in 2023, according to an annual survey released in December by the Plan Sponsor Council of America.
CFP Anne Reilly, principal and CEO of Alpha Financial Advisors in Charlotte, North Carolina, said clients can “be penalized for going over the limit early” without making adjustments. He said this meant “leaving money on the table.” She is also a certified public accountant.
For example, let's say you're under 50, your annual income is $200,000, and your company offers a 5% 401(k) match with no adjustments.
With 26 pay periods and a 20% contribution rate, you'll reach your $23,500 deferral limit in 2025 after 16 paychecks and only receive an employer match of about $6,200. In this case, if you max out early without adjusting, you'll miss out on about $3,800 in your employer's 401(k) match.
Riley says you can learn more by reviewing your 401(k) summary plan description, which includes important details about your account.
Extended deferrals, withdrawal of contributions towards 2025
Of course, many investors cannot afford to maximize employee deferrals given their competing financial priorities.
Only about 14% of employees I maxed out my 401(k) plan Vanguard's 2024 How America Saves report is based on data from 1,500 eligible plans and nearly 5 million participants.
