We’re almost done with Q1, which means you should have contributed about $5500 to your 401k so far.
If you’re a high achiever, you might be tempted to max out your 401k as early as possible. Is that a good idea?
Yes and no.
YES, IT’S A GOOD IDEA
It’s financially advantageous to prioritize your 401k contributions in your savings waterfall because you get more money to work sooner.
Your 401k is pre-tax, meaning you save first, then pay taxes (upon distribution).
That lets you save MORE than you could if you paid taxes first and THEN saved.
For instance, if you contribute the $22,500 PRE-TAX maximum to your 401k, the entire amount is saved and invested.
Alternatively, if you paid taxes on the same $22,500 and THEN save, you’d only end up with about $15,000.
So the more money you can get to work sooner, the better. And that’s your 401k.
NO, IT’S A BAD IDEA #1
You could miss your company match.
Some 401k’s – like Amazon’s – penalize you if you frontload.
Those 401k plans only match a maximum amount for EACH contribution. So if you don’t spread the contributions out over the year, you won’t get all of your free money.
Check your 401k’s Summary Plan Description to verify how your company match works.
NO, IT’S A BAD IDEA #2
401k contributions lower your living expense threshold, which can be helpful for people who are wired as spenders.
Monthly 401k contributions reduce your means.
Assuming you live within your means, that will act as a forcing function to keep your spending lower.
If you’re a spender, you CAN still front load your 401k as long as you save the after-tax equivalent after you’re maxed.
In other words, once you max out, don’t SPEND the extra money in your checking account. Instead, turn around and save that automatically into taxable long-term savings.
That will keep your means (and expenses) consistent.
Like so many things in personal finance, the “right” answer is a mixture of managing to both the numbers and the behavior and front-loading your 401k is no different.
