401k Critical Mistake #9

You’ve been very careful with your 401k plan. You thought you did everything right. But ask yourself this question:

Will your 401k contributions reach the maximum annual IRS limit before your last paycheck of the year?

If your answer is yes, or if you aren’t sure, there’s a strong chance you’re going to make 401k Critical Mistake #9 in THE 10 CRITICAL 401k MISTAKES series.

How so? Read on!

401k Critical Mistake #9 happens when your employer stops making matching contributions to your 401k because your employee contributions reached the annual IRS limit before you received your full employer match.

The IRS limits the pre-tax amount you may contribute to your 401k each year. For 2025, the limit is $23,500 for those under 50, $31,000 for those ages 50-59 and 64 or older, and $34,750 for those ages 60-63.

The result of making 401k Critical Mistake #9 is missing out on employer 401k matching contributions you were otherwise entitled to receive.

How does this happen?

If you plan to contribute the maximum allowable IRS limit every year to your 401k, many employers expect you to do so by making equal contributions spread out over every paycheck during the year. “Frontloading” occurs when your 401k contributions reach the maximum allowable IRS pre-tax limit prior to your final paycheck of the calendar year. When you “frontload”, your 401k contributions might stop. If they do, your employer matching contribution will also likely stop, which could lead to you not receiving the full employer match you were otherwise entitled to receive.

401k Critical Mistake #9 is best understood by case study.  Imagine you find yourself facing two different scenarios.

Scenario 1:

• Age 50
• Salary $310,000
• 401k Contribution: 10%
• 401k Employer Match: 5%
• 26 pay periods per year

A $310,000 salary spread over 26 pay periods means you’ll earn $11,923 per paycheck. Therefore, each paycheck you’ll contribute 10% or $1,192 to your 401k.  In addition, your employer will make a matching contribution of 5% of each paycheck, or $596. After your 26th and final paycheck for the year, you’ll have made 401k contributions totaling $31,000 and received your full $15,500 of employer match. 

So far, so good.

Scenario 2:

• Same as Scenario 1, but now assume your 401k contribution percentage is 15% instead of 10%.

Kudos for the higher contribution rate, but in this scenario your 5% employer match is about to take a major hit on your 18th paycheck.  

Say, what? What problem will you face on your 18th paycheck?

Again, the IRS limits the pre-tax amount you may contribute each year to your 401k.  For 2025, the limit is $23,500 for those under 50, $31,000 for those ages 50-59 and 64 or older, and $34,750 for those ages 60-63. After the 17th pay period, with this higher contribution percentage, you’ll have made 17 contributions totaling $30,404, which is just below the $31,000 IRS limit. 

On the 18th paycheck, however, your 401k contributions will exceed the current IRS limit of $31,000. When you reach this limit, unbeknownst to many, your 401k plan will probably STOP the contributions you are making. When this happens, things only get worse.

What also stops when you stop making contributions to your 401k?

You guessed it!  When you stop making 401k contributions, your employer matching contribution will most likely stop as well!

In this second scenario, you’ll miss out on your employer’s matching contribution on paychecks 18 through 26. That means you could miss the employer matching contribution on your last 9 paychecks

• If you are certain your 401k contributions will reach the maximum allowable IRS limit before your final paycheck for the year, confirm you will do so by making equal 401k contributions spread out over every paycheck during the calendar year.  Your goal is to not miss one penny of employer match.
• If the calendar year has already started, and you discover that your 401k contributions are on pace to reach the maximum allowable IRS limit prior to your final paycheck of the year, consider immediately reducing your 401k contribution percentage so that you won’t reach the maximum allowable IRS limit until your final paycheck of the year.
• Some 401k plans allow contributions over and above the maximum allowable pre-tax IRS limit by allowing you to make “after-tax” contributions.  If your 401k plan allows this, making 401k after-tax contributions may allow the employer matching contributions to continue in the event your contributions reach the maximum allowable pre-tax IRS limit prior to your final paycheck.
• If your 401k plan allows after-tax contributions over and above the maximum allowable pre-tax IRS limit, you may be a candidate for two very attractive tax planning strategies.  To learn about these strategies:

  401k Critical Mistake #1: Solve Your 401k Problem with Mega Backdoor Roth

  401k Critical Mistake #2: Leaving Existing 401k After-Tax Contributions to a Roth IRA