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When you make out the form to contribute some of your income for a 401K or Roth 401K, your HR department will default to setting equal deductions for each pay period in the year. However, you can change this.
You can request a larger dollar amount per pay period so that your 401K contribution is complete before year end.
This can be helpful if you may be leaving your job, voluntarily or involuntarily, before year end. You’ll complete your contribution early. And, if your employer match occurs each pay period rather than at year end, you’ll get the entire match early.
Note: This only works if you can afford to have less net income per paycheck early in the year.
I first did this when my employer was struggling financially. When the company was acquired and I was laid off in April, my contributions and the employer match were equivalent to what would normally only have accumulated by August.
When I was next able to contribute to a 401K, I again set up an aggressive contribution. When I retired at the end of August, my contributions and the employer match were complete for the year.
You can also do this with an HSA. Front load your contributions so that they are made by April and not August.
Alice, I do this every year. It is painful in the beginning of the year and you generally need savings to get through those months, but I like getting it over with. I am not sure if it is the best dollar cost averaging approach but I like it.
Most employers allow changes in contributions at least once a month, perhaps each pay period, but the downsize of this is you minimize the averaging of investment purchases – it could be good or maybe not. But you have made a good point worth considering.
Oh, interesting. I’m planning on retiring on July 1 next year. So I could contribute the full amount for 2025 in the first six months? I might just do that.