Maximize Your 401(k) Contributions in 2025 with This Key Feature
As you plan your retirement savings strategy for 2025, it’s essential to understand the ins and outs of your 401(k) plan, particularly the “true-up” feature. This often-overlooked benefit can make a significant difference in your employer’s matching contributions.
What is a 401(k) True-Up?
A 401(k) true-up is an additional payment made by your employer to fulfill their annual matching amount to your savings. This occurs when the employer’s total matching contributions at the end of the year are less than the plan requires. Essentially, it ensures you receive the full employer match, even if you max out your employee deferrals early in the year.
The Benefits of Front-Loading Contributions
Contributing aggressively to your 401(k) plan in January can be beneficial, as it maximizes market exposure from day one. Lump-sum investing, or putting larger amounts of money to work sooner, can increase growth potential, according to research from Vanguard.
Understanding Your 401(k) Plan
However, not all plans offer a true-up feature, so it’s crucial to review your plan details before front-loading contributions. Roughly 67% of 401(k) plans that offer matches more than annually had a true-up in 2023, according to a yearly survey by the Plan Sponsor Council of America.
The Consequences of Missing Out
Without a true-up, you may miss out on a significant portion of your employer’s matching contribution. For example, if you’re under age 50, making $200,000 per year, and your company offers a 5% 401(k) match without a true-up, you could miss roughly $3,800 of your employer 401(k) match by maxing out early.
Check Your Plan Details
To avoid leaving money on the table, review your 401(k) summary plan description, which outlines key details about the account. This will help you understand if your plan offers a true-up feature and how it works.
2025 Contribution Limits
For 2025, employees can defer $23,500 into 401(k) plans, plus a catch-up contribution of $7,500 for investors age 50 and older. Starting in 2025, the catch-up contribution rises to $11,250 for savers age 60 to 63.
Prioritizing Your Finances
While maxing out employee deferrals is ideal, many investors face competing financial priorities. Only about 14% of employees maxed out 401(k) plans in 2023, according to Vanguard’s 2024 How America Saves report. It’s essential to strike a balance between saving for retirement and addressing other financial obligations.
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