Updated : Aug 28, 2019 in Articles

401k retirement plan True Up Feature


today is Q&A Tuesday and today we’re
gonna talk about the 401k and a special feature that might help you save the
most possible and get the most matching contribution. So today’s question comes
from Mark and Mark asks are there any drawbacks to maxing out the 401k in the
beginning of the year now it doesn’t matter if you’re a delayed saver you
make changes to your 401k or want to save a ton of money it actually doesn’t
matter because this could affect you and you might be missing out on free money
so you’re definitely gonna want to watch this if you have a 401k and it has
matching contributions but before we do if this is your first time at our
channel or you haven’t subscribed click on the subscribe button at the bottom my
name is Travis Sickle CERTIFIED FINANCIAL PLANNER with Sickle Hunter Financial Advisors. so even if you’re contributing the match amount the percentage you actually might be missing out on the match because you might be
doing it wrong and there’s a couple of ways or a couple things that you need to
look at that I’m gonna point out today but before we do that let’s get into
just the general contributions of the 401k so you know where you are and you
know what the max contribution you could put in now there are some people out
there that think the max contribution is only up to the match and that’s not true
so the 401k for 2019 is a maximum contribution of $19,000 now if you’re 50
or older you can do an additional $6,000 now you want to key in on the matching
contribution because that is the free money that you want to make sure that
you’re at least getting that portion to it but just because you are contributing
the same amount so let’s say that it’s a 6% match or a 4% match and you’re
putting that 4% or 6% then you should be getting 4 to 6 percent but not
always so how is that even possible if you’re putting in 4 percent or 6
percent and you don’t get the full 4 or 6 percent match so let me start
with an example so this is going to be somebody who earns$52,000 a year and we’ll have them contributing
after six months because they just got this job maybe January 1st again for
easy math and they want to wait for whatever reason maybe you want to just
get situated you want to make sure you can pay your bills you’re really excited
about saving but you just want to get things situated before you start those
contributions so you wait six months again for easy math so let’s say you
make $52,000 a year so that’s $1,000 a week or $2,000 every other week so that
would be 26 pay periods for the year so after six months that means we would
have thirteen payments left to make so it’d be two thousand dollars per
paycheck of that two thousand dollars we’re gonna contribute eight percent now
remember the match is four percent so we’re gonna say hey I want to contribute
the full amount for the year so I’m gonna double my contribution so that’s
eight percent for the rest of the year so that means each paycheck we would
save a hundred and sixty dollars because that’s eight percent of our two thousand
dollars so that’s gonna be a hundred and sixty dollars multiply that by six
months or the thirteen pay periods that are left and that’s going to equal a
total contribution of two thousand and eighty dollars now when you’re making
those contributions it’s done on a per pay period or per paycheck period basis
so what that means is you’re gonna get eighty dollars because that’s four
percent remember the match was four percent so we’re gonna get that four
percent but it’s only gonna be eighty dollars and again that’s gonna be
multiplied by the same amount same six months so it’s gonna equal to one
thousand forty dollars now let’s take a minute and review that that means we
were contributing eight percent for six months which would work out to that two
thousand and eighty dollars now that means you contributed a total of four
percent because your total contribution was 52,000 but because you waited the
six months it was only based on that six months so it’s per paycheck which equals
what exactly what you got as a match which was the one thousand and forty
dollars so you missed out on exactly $1,040 dollars if you had done it
over the course of the year unless and here’s the key feature unless your plan
has what’s called the true up feature what that means is at the end of the
year they go back and say okay in this situation you made $52,000 and you
contributed two thousand and eighty dollars which is 4 percent therefore
we’re going to contribute the additional $1,040 to bring that total
match to $2,080 which is the full match of the 4%
now that’s the key feature so you want to go back if you’re making any
sort of adjustment to your 401k and make sure that it has this true up feature so
it’s a simple feature a lot of plans have it but not all of them so you want
to check that now why would that be important well if you know that your
plan does not have the true a feature or does have the true up feature it might
affect how you start your savings so in this instance if you did not have the
true up feature you might actually want to consider making additional sacrifices
elsewhere to make sure that you’re getting that full match well knowing
that you’re going to start contributing in six months so maybe you just bite the
bullet and do it early on the flipside if you knew you had the true up feature
then it wouldn’t be an issue in this scenario because you have the true up
feature you double down and started contributing the full 8% which would catch you up to the full 4% for the entire calendar
year because that’s what the contributions are based on. On the entire
calendar year so you want to make sure the true up feature is a part of your
plan now if it’s not there’s not a whole lot
you can do but it’s again a good idea just to know about the true up feature
whether or not you have it so you know how to make those contributions so that
first scenario was our delayed saver now let’s talk about somebody who’s an
aggressive saver and any income level let’s say the same scenario where you’re
you’re doing a different contribution then the full 4% where you’re
doing maybe 10% or 15% and you max out your 401k before the end of
the year now the same scenario where you’re you’re matching you’re getting
those matching contributions on a per paycheck basis so what that means is.
Let’s say that we did this in the first half of the year that we only wanted to
contribute the 10 or 15% for the first six months of the year and let’s say
doing that math we hit the maximum contribution of $19,000 well what that means is the next paycheck after that you your plane would
not allow you to contribute any other any other money so that means you’re not
going to get the match again so if you don’t have the true up feature you’ve
contributed the maximum amount and will actually be shorted the amount of
matching contributions now the same instance applies to this with the true
up feature where if you have the true up feature they’re gonna look at the math
and see that you contributed the full 4% and they will make sure
that you’re getting the full 4% match. In order to fix this
scenario, this fix even if you don’t have the true up feature is a little bit
simpler because all you need to do is making sure that you’re contributing all
the paychecks throughout the course of the year so maybe instead of
contributing your 10 or 15% for the whole entire year maybe you bring that
down so you’ll hit that full $19,000 contribution limit at the end of the
year now doing so and making sure that it’s spread out throughout the course of
the year will ensure that you’re getting the full company match so again this
goes back to the true up feature and it’s very very important that you’re
familiar with the true up feature and it’s it’s quite simple what if it had if
you have the true up feature that means you’re going to get the full match if
you contributed the right percentage based on your annual contribution and
not on a per paycheck basis so really at any income level or contribution amount
you want to be aware of the true up feature because if you’re not
contributing the right amount at the right time you might be missing out on
free money and as I showed you in the first example you would have missed out
on $1,040 going into your plan just because you made a timing
error so it doesn’t really matter if you’re a delayed saver or you make
changes or you’re an aggressive saver and you’re saving a lot of money so it
doesn’t matter anybody can be affected by the true up feature whether or not
you have it so it’s a good idea to just do a little research and figure out
whether or not you have it so you can make sure that you’re contributing
right amount at the right time into the 401k to maximize your retirement plan
contributions and just to have more money in your pocket if you’ve enjoyed
this video be sure to subscribe and leave your comments down at the bottom

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