My Personal Finance Journey

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Putting 401(k) Contribution In Full Throttle

Contributed by mm | March 2, 2005 1:40 AM PST

A few months earlier when I discussed my 2005 plan of 401(k) contributions, I mentioned I would be slow in contributing to my own account for short-term liquidity but will contribute to the full amount toward my wife's 401(k) account to shielf as much fund as possible from immediate income tax. Some new developments since then changed part of the landscape and I am therefore changing my directions now.

First, we realized that in 2005, Microsoft 401(k) Plan allows deduction of up to 50% of payroll as pre-tax contribution toward 401(k) accounts, compared to the upper limit of 25% in the prior years. As a result, almost everyone in Microsoft can contribute to the full amount of $14,000 allowed by IRS -- after all, if you are willing to save, you only need to earn $28,000 a year to achieve this maximum allowed contribution amount. (It is interesting that Microsoft didn't advertise this employee-friendly move.)

Second, there is a small possibility that I will be assigned to a short-term overseas project later this year and if this becomes true, I will be technically removed from Microsoft's US payroll, thus become ineligible of contributing to 401(k) plans. It is, therefore, in my best interest trying to contribute to 401(k) account to the full allowed amount as early as possible.

So, starting from my February monthly summary, you can see I am putting my 401(k) contribution percentage to full throttle. By contributing 50% of pre-tax payroll to both 401(k) accounts, we are expecting a full $28,000 contribution (plus employer matching) well before the year ends.

This Post Has Received 6 Comments. Share Your Opinions Too.


Dima M Commented on March 2, 2005

You have to balance the benefits of this move against the possibility that you can loose your job ( G-d forbid). If this unlucky event happens and it takes you some tme to find a new job, the money you have contributed will be deducted against much lower income thus lower tax bracket thus lower savings.
I do the contrary to your idea (granted, we are in a different businesses and have different chances of loosing jobs): I start by contributing 1% and later on in the year raise my contribution to 25% to catch 14K limit


mm Commented on March 2, 2005

Yes, you are right. Confidence on job security is one reason behind my change. I was wondering at 1%, will you be able to receive the full benefit of employer matching?


Nathan Commented on March 3, 2005

mm, I was wondering the same thing about your plan. I know my employers matches $.50 to each dollar up to 10% per paycheck. That means if I hit my 14k limit early by contributing 25% I would be missing out on some employer match.


Dima M Commented on March 3, 2005

I do not have an employer match at all :(
So, I have two benefits from 401k
- tax savings
- stable value fund (not avaiable outside of retirement plans) currently yielding 3.5% practically guranteed


rem Commented on March 14, 2005

For those over-50, you may also be able to max-out 401 Catchup contributions (max $4000 in 2005) in the same way. My plan allows me to put in 30% for the 401 Catch-Up contributions, at the same time putting 50% in regular 401K plans (therefore 80% deduction making for a very small net paycheck).

Note--- It is not necessary to max out the regular 401K contributions before you make Catch-up contributions.


bw Commented on June 11, 2005

If you max out your 401k contribution early, wouldn't you lose the employer match for the remainder of the year? Also, which stocks are you buying?


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