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PostPosted: Mon Apr 30, 2012 9:33 pm 

Joined: Wed Jul 28, 2010 1:35 pm
Posts: 443

Anyone tried maxing out 401k (or similar) contributions at the beginning of the year?


For example, the contribution limit this year in $17k, why not adjust your contribution on Jan 1 to consume your entire paycheck until the $17k limit is reached (assuming you plan to max out anyway)?


For some people, the problem would seem to be no paycheck for a certain number of months, but many people with a RE or ERE mindset will have the funds on hand to not need a paycheck for at least 6 months. Is there a benefit to maxing out early vs contributing equal amounts throughout the year?




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PostPosted: Mon Apr 30, 2012 9:41 pm 
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Joined: Sun Jul 03, 2011 2:20 pm
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Location: Stepford USA

You might lose out on company match money depending on how your company's plan is structured. You are also effectively "timing the market" and don't get the benefit of dollar cost averaging (if you subscribe to that theory).




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PostPosted: Mon Apr 30, 2012 10:02 pm 

Joined: Wed Jul 28, 2010 1:35 pm
Posts: 443

I hadn't thought about the matching-- most likely because I don't get matching. I get a fixed percentage regardless of my contribution.


I had thought about the timing the market thing, and the dollar cost averaging-- as for timing, obviously it's best to buy low and sell high, but once we're beyond that the length of time that money is invested is an important factor. By front loading I'd increase the amount of time my pre-tax dollars are invested but reduce the amount of post-tax dollars that are invested. Hard to quickly know if that makes much of a benefit.


As for dollar cost averaging, I'd still be doing that-- if you buy once per year, or once per month, you're still buying at different prices, no?




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PostPosted: Mon Apr 30, 2012 10:28 pm 
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Joined: Sun Jul 03, 2011 2:20 pm
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Location: Stepford USA

Related post at TFB: http://thefinancebuff.com/lump-sum-dollar-cost-aveage-or-wait-for-dip.html (if you read the comments you'll see I asked almost the exact same question) I haven't found an answer yet that convinces me one way or the other.




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PostPosted: Mon Apr 30, 2012 10:30 pm 

Joined: Thu Jul 22, 2010 10:43 pm
Posts: 505

@Mo

I've considered this as well, probably because I also get a 4% employer contribution automatically once a month regardless of my contributions.


The only restriction on our company plan is maximum 91% of salary, so as to provide sufficient funds for social security, medicare and state disability.


I already employ a dollar value averaging strategy; so that all contributions go into a money market fund initially. I then transfer a set amount three times a year to achieve a self-chosen yield target (currently 6% p.a.). If my underlying stock fund is beating my target, I transfer the excess for that four months to the money market fund. Otherwise, I transfer only enough to meet my goalpost for the third of the year to the stock fund (i.e. sufficient to ensure 2% growth over the past four months).


So, it should be possible to front-load and fully fund the money market fund. I started getting the catch-up contribution last year, so it's $22.5 K for me. These funds would be in place about the time the first adjustment milepost surfaces on May 1.


This has the added advantage of taking money off the table when stocks have been on a tear, as they have recently. I just wish the money market fund had a bit better yield for some additinal upside.




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PostPosted: Mon Apr 30, 2012 10:58 pm 

Joined: Sat Dec 04, 2010 1:03 am
Posts: 489

I maxed out the 401k (no match) as early as possible when I was employed. I have no idea as to the relative effect on performance, but was doing it for a different reason; I just had no faith that I would finish out the year, one way or another, and so wanted to get as much under the tax umbrella as quickly as possible.




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PostPosted: Tue May 01, 2012 12:33 am 

Joined: Thu Jul 22, 2010 12:18 pm
Posts: 555

My 401k is already maxed ($17k contributed) for 2012. And my personal IRA ($5k contributed).


Pros:

1) The investments have more time to grow tax deferred

2) If you lose or quit your job, you already took maximum advantage of the IRA tax benefit for the year without having to get another job.


Cons:

3) Less dollar cost averaging

4) Less predictable income per month, in case you have automatic transfers out of your checking account, etc.


I think the Pros (significantly) outweigh the Cons.




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PostPosted: Tue May 01, 2012 1:32 am 

Joined: Fri Aug 13, 2010 11:40 pm
Posts: 59

I max out while leaving enough for remaining yearly match (with a buffer for max possible salary increase).

When you are front loading, remember you can't do 100% paycheck since you need to leave some money for social security and medicare tax.

Only potential negative I see (if you have the cash) is losing some matching on a job change if your new job would allow for more matching.


By front loading, you are saving taxes at an earlier date which has a higher present value.




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PostPosted: Tue May 01, 2012 2:53 am 
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Joined: Fri Dec 10, 2010 1:42 am
Posts: 180

I have front loaded since 2008 and with my house paid off I have increased the front load rate this year (currently at 40% of my paycheck). Also I don't have a match (I have a pension instead) so front loading isn't an issue. Already I have contributed $11,000 in my 457 plan for 2012. Does it help? It should with a slowly upward moving market, though markets have been anything but sensible in recent years. The best year for me was 2009 when the market tanked in March, allowing me to buy alot at low prices and my return was shown at 55% for the year. Other years this hasn't helped much. Hard to say if this strategy will help or hurt this year.




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PostPosted: Tue May 01, 2012 4:50 am 

Joined: Mon Aug 02, 2010 4:45 am
Posts: 775

As @Hoplite said, front-loading can pay off if you unexpectedly separate from your employer partway through the year. If you already frontloaded at that point, you already got the full deferral benefit, and possibly the match depending on how it's structured.


I think the difference between DCAing for 12 months vs. the first few months is probably negligible.


I don't think there's a very strong case for either approach so I'd just do whatever you prefer.




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PostPosted: Tue May 01, 2012 3:18 pm 

Joined: Thu Jul 28, 2011 6:40 pm
Posts: 459

I am currently front loading due to imminent job loss. I use a TSP but it is equivalent to these plans.


Pros: Take advantage of maximum tax deferment as well as put maximum amount of money into the TSP which is known for having about the lowest expense ratios, anywhere.


Cons: Possibly giving up about 4 months of employer matching; they match up to 100% of 5% of salary per pay period, so if you do not contribute in a particular pay period, you get no match. So I will be monitoring that "final end date" to make sure I hit it right on the nose. There is risk that I will be re-employed again by the end of the year and eligible for some kind of matching (that I would then have to give up) but that is so uncertain that I can't bank on it really.




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PostPosted: Sun May 06, 2012 7:28 pm 

Joined: Fri Jul 23, 2010 12:41 pm
Posts: 93

I max my 457b out by July. I also contribute smaller amounts to 401k, IRA, and taxable brokerage account. I like the idea of funding these as soon as I can. Hell, some years I get pissed off and just want to quit work for six months. Then, I'm thankful that I put so much in early in the year, especially come tax time.


Larry




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