Why Not Front Load 401k Instead of DCA?

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watchnerd
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Why Not Front Load 401k Instead of DCA?

Post by watchnerd » Thu Jan 16, 2020 11:34 am

If DCA doesn't actually lead to better returns, why not front load my 401k?

My plan allows me to contribute up to 65% per pay period.

Is there any reason not to front load it as much as possible to get more time in market and lock-in the employer match earlier?
Last edited by watchnerd on Thu Jan 16, 2020 11:36 am, edited 1 time in total.
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02nz
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Re: Why No Front Load 401k Instead of DCA?

Post by 02nz » Thu Jan 16, 2020 11:36 am

Some employers match on a per pay period basis. If you hit the employee contribution max in say June, then your contributions stop and you miss out on employer matching the rest of the year. Other employers do an annual "true-up," in which case this is not an issue.

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watchnerd
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Re: Why No Front Load 401k Instead of DCA?

Post by watchnerd » Thu Jan 16, 2020 11:38 am

02nz wrote:
Thu Jan 16, 2020 11:36 am
Some employers match on a per pay period basis. If you hit the employee contribution max in say June, then your contributions stop and you miss out on employer matching the rest of the year. Other employers do an annual "true-up," in which case this is not an issue.
Ours matches 50% at the time of contribution, per pay period.

There is no max match limit other than the IRS 401k contribution limit.

Post-50 catch-ups are excluded.
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atdharris
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Re: Why Not Front Load 401k Instead of DCA?

Post by atdharris » Thu Jan 16, 2020 12:03 pm

Because my employer only matches per pay period. I'm leaving free money on the table if I go all in first of the year.

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Re: Why Not Front Load 401k Instead of DCA?

Post by watchnerd » Thu Jan 16, 2020 12:04 pm

atdharris wrote:
Thu Jan 16, 2020 12:03 pm
Because my employer only matches per pay period. I'm leaving free money on the table if I go all in first of the year.
That makes sense.

Not an issue with our plan.
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Re: Why No Front Load 401k Instead of DCA?

Post by sailaway » Thu Jan 16, 2020 12:06 pm

watchnerd wrote:
Thu Jan 16, 2020 11:38 am
02nz wrote:
Thu Jan 16, 2020 11:36 am
Some employers match on a per pay period basis. If you hit the employee contribution max in say June, then your contributions stop and you miss out on employer matching the rest of the year. Other employers do an annual "true-up," in which case this is not an issue.
Ours matches 50% at the time of contribution, per pay period.

There is no max match limit other than the IRS 401k contribution limit.

Post-50 catch-ups are excluded.
Sounds like you are good to go. DH front loads with a per contribution match, as much as anything to get the match in case he doesn't finish out the year. I guess it also gets the match into the market, for that matter.

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anon_investor
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Re: Why Not Front Load 401k Instead of DCA?

Post by anon_investor » Thu Jan 16, 2020 12:09 pm

If you can afford to do so and won't lose out on a match go for it. This is the same logic that people use to make IRA contributions on 1/1.

For me, I have to space out my contributions in order to receive my full company match. Also, because I fall under the IRS definition of a Highly Compensated Employee, my 401k plan caps my per pay check contributions to a certain percentage, preventing me from maxing out my 401k too early, even if I wanted to. This is not even addressing potential cash flow issues.

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Re: Why Not Front Load 401k Instead of DCA?

Post by Spirit Rider » Thu Jan 16, 2020 12:15 pm

watchnerd wrote:
Thu Jan 16, 2020 11:34 am
Is there any reason not to front load it as much as possible to get more time in market and lock-in the employer match earlier?
If you are contributing the full employee deferral limit pre-tax and your savings rate/IPS has you also making tax efficient taxable investments. A strong case can be made that front-loading pre-tax contributions is less optimal.

If you are maximizing pre-tax employee deferrals, you are getting the full tax reduction for that year, regardless of when you make the actual deferral

The value of front loading investments exist regardless of whether they occur in a pre-tax or taxable accounts. The only difference is whether the earnings from front-loading occurs in the pre-tax or taxable account.

For people maximizing pre-tax deferrals, who will be in one of higher tax brackets, it will be more beneficial for the earnings to be in taxable. In fact, they should prioritize their front-loading to HSA accounts, Roth accounts, taxable accounts and only then pre-tax accounts.

Note: This is totally separate and distinct from the determination on whether employee contributions to an employer plan should be pre-tax, Roth and/or employee after-tax if available.

To summarize. It is the front-loading of investments in general that is the real benefit. Not necessarily that it is advisable to front load pre-tax contributions.

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Re: Why Not Front Load 401k Instead of DCA?

Post by mervinj7 » Thu Jan 16, 2020 12:18 pm

watchnerd wrote:
Thu Jan 16, 2020 12:04 pm
atdharris wrote:
Thu Jan 16, 2020 12:03 pm
Because my employer only matches per pay period. I'm leaving free money on the table if I go all in first of the year.
That makes sense.

Not an issue with our plan.
What happens if you change employers mid year? Wouldn't you lose the match at the second employer if you already maxed out?

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Re: Why Not Front Load 401k Instead of DCA?

Post by mcraepat9 » Thu Jan 16, 2020 12:22 pm

Even ignoring the match implications, I just find the DCA method easier from a liquidity and cash flow perspective. It requires less maintenance and attention from me. My goal is to automate as much as possible and avoid my intervention or supervision.
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Re: Why Not Front Load 401k Instead of DCA?

Post by bloom2708 » Thu Jan 16, 2020 12:26 pm

Sometimes people need a certain take home pay and cannot put so much in their 401k that their check is small.

Others certainly can and do. Matching details and need to have a paycheck would be two reasons.
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Re: Why Not Front Load 401k Instead of DCA?

Post by beehivehave » Thu Jan 16, 2020 12:26 pm

It's pretty difficult to pass up immediate 50%-100% tax-free returns, which is what employer contributions represent.

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Re: Why Not Front Load 401k Instead of DCA?

Post by watchnerd » Thu Jan 16, 2020 12:40 pm

Spirit Rider wrote:
Thu Jan 16, 2020 12:15 pm
watchnerd wrote:
Thu Jan 16, 2020 11:34 am
Is there any reason not to front load it as much as possible to get more time in market and lock-in the employer match earlier?
If you are contributing the full employee deferral limit pre-tax and your savings rate/IPS has you also making tax efficient taxable investments. A strong case can be made that front-loading pre-tax contributions is less optimal.

If you are maximizing pre-tax employee deferrals, you are getting the full tax reduction for that year, regardless of when you make the actual deferral

The value of front loading investments exist regardless of whether they occur in a pre-tax or taxable accounts. The only difference is whether the earnings from front-loading occurs in the pre-tax or taxable account.

For people maximizing pre-tax deferrals, who will be in one of higher tax brackets, it will be more beneficial for the earnings to be in taxable. In fact, they should prioritize their front-loading to HSA accounts, Roth accounts, taxable accounts and only then pre-tax accounts.

Note: This is totally separate and distinct from the determination on whether employee contributions to an employer plan should be pre-tax, Roth and/or employee after-tax if available.

To summarize. It is the front-loading of investments in general that is the real benefit. Not necessarily that it is advisable to front load pre-tax contributions.
Sure, but by front-loading the 401k I can get the employer match portion into the market earlier.

Yes, for my taxable accounts, which we also contribute to every month, it is as you said.
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Re: Why Not Front Load 401k Instead of DCA?

Post by watchnerd » Thu Jan 16, 2020 12:42 pm

bloom2708 wrote:
Thu Jan 16, 2020 12:26 pm
Sometimes people need a certain take home pay and cannot put so much in their 401k that their check is small.

Others certainly can and do. Matching details and need to have a paycheck would be two reasons.
We're blessed in that sense in that we don't really need the paycheck.

We save 200% of our annual COL right now.
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Re: Why Not Front Load 401k Instead of DCA?

Post by 305pelusa » Thu Jan 16, 2020 1:32 pm

watchnerd wrote:
Thu Jan 16, 2020 11:34 am
If DCA doesn't actually lead to better returns, why not front load my 401k?

My plan allows me to contribute up to 65% per pay period.

Is there any reason not to front load it as much as possible to get more time in market and lock-in the employer match earlier?
My job is like yours in that they will contribute regardless of what I contribute. This makes it a candidate for front loading.

I STILL don’t do it because I’m afraid if I get fired or leave and then start somewhere else that does match per pay period (and most places do) then I’ll be out of contributions to take advantage of that. For that reason alone, I just evenly spread it out over the year.

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Re: Why Not Front Load 401k Instead of DCA?

Post by sailaway » Thu Jan 16, 2020 1:35 pm

305pelusa wrote:
Thu Jan 16, 2020 1:32 pm
watchnerd wrote:
Thu Jan 16, 2020 11:34 am
If DCA doesn't actually lead to better returns, why not front load my 401k?

My plan allows me to contribute up to 65% per pay period.

Is there any reason not to front load it as much as possible to get more time in market and lock-in the employer match earlier?
My job is like yours in that they will contribute regardless of what I contribute. This makes it a candidate for front loading.

I STILL don’t do it because I’m afraid if I get fired or leave and then start somewhere else that does match per pay period (and most places do) then I’ll be out of contributions to take advantage of that. For that reason alone, I just evenly spread it out over the year.
How good is your current match? Is it less than average for your industry that you would expect the other one to be better? Are you looking for a new job or is a period of unemployment a more likely scenario if you get fired or laid off?

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Re: Why Not Front Load 401k Instead of DCA?

Post by oldfatguy » Thu Jan 16, 2020 1:37 pm

beehivehave wrote:
Thu Jan 16, 2020 12:26 pm
It's pretty difficult to pass up immediate 50%-100% tax-free returns, which is what employer contributions represent.
I'm assuming you know this and just misstated it in your post, but contributions to a 401k are only tax-deferred, not tax free.

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Re: Why Not Front Load 401k Instead of DCA?

Post by 305pelusa » Thu Jan 16, 2020 1:38 pm

sailaway wrote:
Thu Jan 16, 2020 1:35 pm
305pelusa wrote:
Thu Jan 16, 2020 1:32 pm
watchnerd wrote:
Thu Jan 16, 2020 11:34 am
If DCA doesn't actually lead to better returns, why not front load my 401k?

My plan allows me to contribute up to 65% per pay period.

Is there any reason not to front load it as much as possible to get more time in market and lock-in the employer match earlier?
My job is like yours in that they will contribute regardless of what I contribute. This makes it a candidate for front loading.

I STILL don’t do it because I’m afraid if I get fired or leave and then start somewhere else that does match per pay period (and most places do) then I’ll be out of contributions to take advantage of that. For that reason alone, I just evenly spread it out over the year.
How good is your current match? Is it less than average for your industry that you would expect the other one to be better? Are you looking for a new job or is a period of unemployment a more likely scenario if you get fired or laid off?
Im not currently matched. Company just contributes X% of my paycheck per period. It’s probably about the same for the rest of the industry. I’m not actively looking for a job at all but do like that if it came to that and I do end up in a place that does match contributions, that I still have contributions left to take advantage of the match.

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Re: Why Not Front Load 401k Instead of DCA?

Post by White Coat Investor » Thu Jan 16, 2020 1:39 pm

watchnerd wrote:
Thu Jan 16, 2020 11:34 am
If DCA doesn't actually lead to better returns, why not front load my 401k?

My plan allows me to contribute up to 65% per pay period.

Is there any reason not to front load it as much as possible to get more time in market and lock-in the employer match earlier?
I frontload all of my retirement accounts. HSA, Roth IRAs, 529s, cash balance plan in January, 401(k)s in February and March, and then invest in taxable the rest of the year.

Be careful not to lose employer match by doing this. Some of them calculate it differently and don't offer a "true-up" at the end if you don't spread your contributions out throughout the year.
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