Year-End Financial Planning Tip #1: 401(k) Matching Contributions

We could all benefit from year-round attention to our finances.  Yet, in a typical year (2008 is not typical) most people only think about their finances from January 2 until the last Monday of a full week in January.  In 2009, this is January 19.

You: Where did you get such a crazy statistic?

From this Time magazine article, which quotes a person who has calculated depressing day of the year. (Note: the reporter actually says that the “theory has been discounted by many in the academic community” so take it for what it’s worth.)

Still, many people will find that they have completely abandoned their annual New Year’s resolutions by the third week of January, including many aspirations for improving their financial affairs.  So, rather than waiting until January to quit better habits, let’s start now.

You: Start quitting now?

No!  Start better habits now.

You: I knew that.

Maybe with some early momentum, we can keep going well into 2009 and beyond.   Here is the first of five year-end planning tips:

Tip # 1: Maximize Your 2008 401(k) Match

Did you know that the amount of money any employer will match in a 401(k) is limited?

You: Yes. Plus, many folks don’t have a 401(k) match or even a 401(k) plan.

True enough. But for those who do have a matching plan, December is an important time of year to realize that the match limit is an annual one.

You:  I thought the limit was up to a certain percentage of gross pay, like 6%.

That’s true, too.  Let’s say you work for a company earning $40,000 per year and your employer matches 50% on the dollar up to 6% of your gross pay. This means that the maximum match you can receive from your employer is $1,200.  (This is calculated as 6% (the most they’ll match) multiplied by your $40,000 salary = $2,400.   Take the $2,400 and multiply it by the 50% matching percentage for your maximum match of $1,200.)

You: And, in order to get the $1,200 you have to contribute at least $2,400, or 6% of gross pay, to the plan.

Precisely.

You: But how is this related to year-end?  This limit true throughout the year, isn’t it?

Indeed. However, that $1,200 limit is an annual limit.  If you haven’t received the whole $1,200 yet, you probably have two or three paychecks left in 2008 during which you can try to get as much of it as possible.

You: But to do so, you must contribute more!  But that’s true all yearlong!

Yes, but now you don’t have 12 months left. You only have a few weeks. So, instead of raising your 401(k) contribution rate to 6%, raise your contribution level as high as you can possibly afford for just a few weeks- then lower it come January. By doing so, you’ll dramatically increase the amount you have saved for retirement during 2008, maximize the amount of free money you accept and, importantly, avoid permanently forgoing this free money.

You: Permanently forgo?

Once 2009 rolls around, you can never get your 2008 contribution money. Now you’ll have the 2009 limits to contend with.  That’s why December matters.  And it matters every year.

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What other year-end strategies do you wish to share?

Have you ever temporarily adjusted your 401(k) contribution rate strategically?  How did it work out?