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I just want to maximize my employer's contribution. My current employer plan has the following constraints

Company will provide a 100% (dollar-for- dollar) match on the first 5% of eligible W-2

Compensation you contribute on a before-tax 401(k), after-tax Roth 401(k) or after-tax non-Roth basis each pay period, up to the IRS compensation limit. Once your compensation reaches this limit, the company match must end.

Note: The company match is contributed each pay period. In order to receive the maximum company match, you need to contribute a minimum of 5% of compensation on a before-tax 401(k), after-tax Roth 401(k) or after-tax non-Roth basis each pay period.

Suppose I make 100k salary. That means at most the company will contribute 5k

The HR department mentioned it was better to spread my 401k contribution rather than doing a lump sum. I am really confused why that would be the case, when specifically it says 100% match.

Why is it true if I contribute lump sum $5k, it will not be optimized? Am I missing something here?

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That also confused me a lot when I started working in the US. Turns out that by "match on the first 5% of eligible W-2", many (all?) employers mean 5% of your earned W2 so far, not the entire yearly W2.

Let's assume that you get paid every week with 2kUSD. Many (all?) companies will match only 5% of it, ie 100 USD. However, if you contribute more than 100 USD per paycheck to your 401k, then some (but not all) employers will catch up on the missing match at the end of the year, as year-end true-up contributions, to ensure they do 100% (dollar-for- dollar) match on the first 5% of eligible yearly 100kUSD W-2.

Therefore, when "The HR department mentioned it was better to spread my 401k contribution rather than doing a lump sum", ask them if they do end of year true-up contributions, and if so, why they make such a claim.


FYI:

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    Thank you for your answer Would it be optimal then to simply put 5% of your paycheck each week, just to simply get all of the employers contributions and put as little amount to 401k?
    – user
    Jan 30 at 0:01
  • @user I often wonder the same. Let's ask the experts: Should one max out one's 401(k) at the beginning of the year?. Personally I frontload it asap at the beginning of the year. Jan 30 at 0:39

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