We’re trying something new in 2018 with our finances and front loading 401k contributions. Front loading a 401k means to significantly increase our 401k contribution to hit the 401k annual contribution max as quickly as possible. The benefit of doing this is to get our pre-tax money into the market as quickly as possible to give us more months of possible growth. The downside is the risk of the market declining throughout 2018, which basically would mean that we bought when the market was high versus taking advantage of dollar-cost averaging by contributing consistently throughout the year. There’s also the downside of receiving zero cash for a few pay periods, but we can cover living expenses from cash for the time being.
Even though markets are at an all-time high and experiencing abnormally long bullish trends, I also know that we will always max out our tax-advantaged retirement accounts on an annual basis one way or another. That combined with some other changes to our lives in 2018 that we foresee but can’t accurately predict, I’m making the call that it’s in our best interest to max out my 401k contributions as quickly possible.
Of course, right out of the gate I made a rookie mistake by miscalculating how much I could contribute while covering my regular deductions.
Calculating Your 401k Contribution Without Angering HR
I made a rookie mistake right out of the gate. Over the weekend, I logged into my 401k provider’s website and adjusted my contribution percentage to 99%. My assumption was that so long as I left enough of my wages to cover regular contributions to my flexible spending account and insurance premiums, I could contribute the rest as pre-tax contributions to my 401k. And since this money was contributed as pre-tax, it would bring my taxes down to zero since I had no taxable income.
On Monday, I had an email from my benefits administrator indicating that at 99%, my paycheck would be negative, which they couldn’t allow.
After some additional research, my error came from the fact that the government is going to collect FICA taxes (social security and Medicare) based on my regular earnings before any deductions. In 2018, I’m responsible for paying 1.45% of my earnings for Medicare and 6.2% for social security. At 99% contribution, I obviously wouldn’t have left enough money in my paycheck to cover these taxes (1.45% + 6.2% = 7.65%). Side note: as far as I know, I’m always responsible for paying the 1.45% Medicare tax, but I’m only taxed for social security up until the point that I contribute $7,960 for 2018.
Instead of adjusting my contribution to 92%, I ultimately decided to adjust it such that I would hit the 401k max contribution after the third paycheck from this point in time. One pay statement has already come in for the year, so I simply took the remaining, contributable balance, divided by 3, and then calculated the percentage I needed to contribute off my regular earnings. In my case it was 79%.
So back into the 401k profile settings I went, and now I’m locked and loaded for the year. At least until I get another email from HR indicating that my math and understanding is still lacking something.
Front Loading My 401k, But Not Hers
Regarding Mrs. FI Exec’s 401k: she’ll be taking 6 months off (some paid and some unpaid) with the expected birth of our third child in February, so we’re not worried about front loading her 401k right now. Rather, once I get a better grip on what our regular pay statements look like now that the Tax Cuts and Jobs Act is in place, I’ll plan our 2018 income, taxes, spending, and investment strategies to figure out how we should contribute to hers.