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Does it make sense to put a lump sum into a 401(k)?

April 27, 2012: 5:05 AM ET

Do companies match lump-sum contributions to your 401(k)? If not, does it still make sense to put a lump sum into a 401(k), provided you could still afford to make regular payroll contributions to the plan throughout the year to take advantage of company matches?
-- Eric B., Charlotte

Check with your employer's plan to see what is and isn't permitted. Federal law doesn't govern the speed with which employees can hit their annual maximum pretax contribution limit, which at the end of 2012 was $17,000 for those under age 50.

If your plan allows you to max out with one contribution or just a few over several pay periods—and still get your full match—well, then, putting your money to work sooner than later is likely a wise move, particularly if you have a bullish outlook for the year.
But you may find restrictions or drawbacks at the plan level. Seventy-one percent of employers issue their match on a payroll basis, calculating it as a percentage of your compensation during that payroll period, according to the Plan Sponsor Council of America (PSCA). In these cases, if you max out too early, you may miss out on part of your match.

Here's the simplest example that highlights the potential problem: Say your annual salary is $204,000, which works out to $17,000 a month. And let's assume your employer offers a 100% match on up to 6% of your salary contributions. If you put all of your monthly pre-tax income—$17,000—into the 401(k) in January, you'd max out immediately. But in this scenario, you might earn a mere $1,020 in company matches, or 6% of your monthly income, instead of $12,240 in matches, which is 6% of your annual salary.

Granted, 58% of companies will make up a match shortfall, often at year-end, via a "true up" contribution, according to the PSCA. In other words, because you put in enough during 2012 to earn the full annual match of your salary—but simply didn't do so over payroll contributions throughout the year—a lump-sum contribution will be made to give you the full amount. So finding out if your company offers a "true up" may determine whether this eager-beaver move makes sense.

-- Stephanie AuWerter

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