Extremely basic 401k matching question

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cdogg44
Posts: 50
Joined: Sat May 25, 2013 11:51 am

Extremely basic 401k matching question

Post by cdogg44 »

I have a question regarding 401k matching and salary amounts.

My wife's plan matches $.50 for each dollar contributed up to 6% equaling a 3% match if you contribute 6%.

Am I correct in understanding that a higher income earner gets a bigger benefit of the match?

Bill makes $100k. At 3% his match would be $3k/year.

Susie makes $40k. At 3% her match would be $1.2k/year.

I don't know why I decided to research this, but here I am. I Googled quite a bit and couldn't find a straight answer, but did find some interesting info on higher income earners spreading their 401k contributions over the entire year to max out in order to gain more of their match.

Thanks
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 6:40 pm

Re: Extremely basic 401k matching question

Post by Laura »

You are correct that higher salaries receive more dollar amounts although it is still only 3%. Spreading out contributions over the year isn't something that impacts only high earners. Many companies match by pay period meaning you must contribute each pay period to receive the full annual match. If you are contributing more early in the year then nothing later in the year you would not get the full match. Make sure and understand how this works in your plan if you don't intend to contribute equally throughout the year.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
cdogg44
Posts: 50
Joined: Sat May 25, 2013 11:51 am

Re: Extremely basic 401k matching question

Post by cdogg44 »

Laura wrote:You are correct that higher salaries receive more dollar amounts although it is still only 3%. Spreading out contributions over the year isn't something that impacts only high earners. Many companies match by pay period meaning you must contribute each pay period to receive the full annual match. If you are contributing more early in the year then nothing later in the year you would not get the full match. Make sure and understand how this works in your plan if you don't intend to contribute equally throughout the year.

Laura
Yes we are on track to spread the full contribution out over all 12 months. I don't know why I thought of this today but it's good to know the answer.
mnvalue
Posts: 1107
Joined: Sun May 05, 2013 2:22 pm

Re: Extremely basic 401k matching question

Post by mnvalue »

Defining "bigger benefit" is tricky. The person making $100k is in a higher tax bracket than the person making $30k, so in dollar terms, the value of the tax deduction is worth more. But, overall, a marginal dollar is worth more to someone who makes less. For the extreme case, think of what another $100k would mean to you vs. what it would mean to a billionaire. Curiosity aside, all your wife can do is maximize the match she's getting.
Texas hold em71
Posts: 595
Joined: Sat May 18, 2013 11:09 am

Re: Extremely basic 401k matching question

Post by Texas hold em71 »

Yes, higher earners shelter more money and get more in the match. There are some limits on high earners. There is a cap of 17,500 per year on what is deferred, so high earners are able to shelter a smaller percentage of their income than lower earners. Plans also go through non-discrimination testing which tests to see if the plans contributions from high earners is out of whack with contributions from low earners. If so, high earners get a portion of their contributions kicked out.
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