Take it to the Max!
Maximizing Your Employer's Match

So you want to take your employer's retirement match to the max, but you're not sure what it takes to do so. The truth is, taking advantage of your match can be relatively easy, but the decision to do so may not be as straightforward as it seems.

What is an Employer Match?
A retirement plan that has an employer match means that your employer puts money in your individual account up to a certain limit usually based on how much you contribute. For example, an employer may match 50 cents for every dollar you contribute up to a certain percentage, such as 6% of eligible pay. This percentage can also be represented by a maximum dollar figure, such as $1,000. This is a wonderful benefit and great way to add to your retirement savings.

You will want to take a little time to consider your match and the best way to maximize that benefit. The first thing you need to do is decide if you want to contribute the same amount every pay period, or put in more in the beginning of the year. Your decision really depends on how much you earn and how much risk you want to take.

To Maximize or Not to Maximize — the Question is Yours to Answer
The first thing to do is evaluate how much you earn annually and determine whether or not you will hit the IRS savings limit ($10,500 in the year 2000). If you will not hit the limit for the year then you may want to consider contributing evenly throughout the year to maximize your company's match. To do so, all you have to do is study your plan and contribute the full amount your employer will match. If you contribute less than what your employer matches, you will still be matched but you will not get as much money as someone who contributes up to the match amount. For example, if your employer matches up to 6% and you contribute 3%, you will get the match for 3% only. Or, if your employer matches the first $400 you contribute, then they will match you at $200 if you only contribute $200.

Contributing evenly over the year may also affect your match. Let's say you contribute 12% for 6 months and then stop contributing. If your employer matches 6% periodically throughout the year, then your employer will only match when you contribute and then only up to 6%. You will be matched up to 6% for the months you contribute 12%. For the rest of the year you won't get anything, that is $0 in matching funds. If you had contributed 6% evenly, you would have gotten the match all year — every time the company matched.

Should you always maximize the match your employer offers? As with all great ideas, there's always a trade-off to consider. For example, you could decide to invest more money early in the year and forget about maximizing the match, and still come out ahead. In an upward moving market, the earnings you receive on investing earlier may be greater than the match you give up, depending on the match amount. The tradeoff only works in your favor if the market moves up and earns you more than you would have earned on your match — a relatively high-risk proposition. The match is almost always a much lower risk proposition.

Highly Compensated Employees Have Additional Considerations
Some employees will earn enough money over the year that they max out at the IRS limits before the end of the year. When you hit the maximum contribution amount early in the year, you end up contributing unevenly. For example, if you earn $105,000 and contribute 15% you will hit the $10,500 limit in eight months. That means you will contribute 15% for eight months and 0% for four months. Because you are contributing unevenly you will not maximize on the company match. You may want to figure out what lower percentage will allow you to contribute evenly for the whole year before you hit the $10,500 limit. In this example with the eligible pay of $105,000, the participant could contribute 10% evenly, if the Plan allows it.

If you earn over $170,000, IRS regulations require that contributions to the Plan have to be cut off. This may cause you to contribute unevenly. There is nothing you can do about this limit. However, you should make sure you contribute the maximum allowed, either $10,500 or your Plan limit, before you reach $170,000 in eligible compensation.

Disclaimer: The views represented above are those of the author, and the information provided here does not constitute any tax, investment or legal advice. The historical data presented are for illustrative purposes only. Past performance is no guarantee of future results.