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- January 31, 2017
Early in the calendar year, it’s a great idea to explore what it means to “front-load” your investments, and why you should doso if you can.
To front-load is to invest a lump sum of money early on, as opposed to dollar cost averaging over a longer period of time. Typically, we’re talking about investing as much as you can afford in the beginning months of the year, although there are other ways to front-load, as we’ll discuss in reason number four.
Note that front-loading has nothing to do with a front-end load, which is a fee paid up front when you invest in certain mutual funds — American Funds are notorious forfees as high as5.75% in many of their popular funds.
How do I front-load? I’ve become a regular front-loading machine in recent years, not unlike our Amana washer.
I front-load two Backdoor Roth IRAs early in January. I max out my 457(b) in two pay periods. I once maxed out my 401(k) after an inquiry with Human Resources, only to find out that it wasn’t a good idea. More on that below.
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1. You’ll Most Likely Come Out Ahead
Assuming you’re investing substantiallyin equities,you should seereturns that move in the direction the overall stock market, which has historically given positive returns for the year about 70% of the time. If you invest early, and returns are positive for the year, your money will realize most of those gains. Periodic investments will give you lots that are only be exposed to the market for a portion of the year, and won’t see all of those gains.
It’s the same argument with lump sum versus dollar cost averaging, as discussed by JL Collins here. Investing a lump sum will win more often than not, although dollar cost averaging can be easier on the psychewhen dealing witha large windfall.
Front-loading isn’t foolproof. If the market drops over the course of the time period you’re looking at, front-loading loses, too. Historically, that will be about 30% of the time, or perhaps less if you’re invested in a balanced portfolio with a heavy bond allocation to reduce volatility and downside risk.
What happens in a flat year? It depends. In a year with low volatility and a graph that looks like something out of Flatliners, front-loading will be no better or worse than investing throughout the year.
If the graph looks like a smile,investing throughout the year wins, as you will be buying some shares at a discount. Front-loading will not have helped in this scenario.
Conversely, if it looks more like a frown, you can turn that frown upside down if you front-loaded. You avoided buying some “over-priced” shares and broke even in a year where investing throughout would have been a losing strategy.
2. You’ve Paid Yourself First
Once you’ve invested that money, it can’t be spent. Paying yourself first is a tried and true budgeting strategy that guarantees you will meet your investing goals.
If you’re in a position where you can consider front-loading, you’ve got a salary that far exceeds your spending needs, and you probably don’t need a formal budget. Nevertheless, front-loading makes those investments your top priority. The motorhome purchase can wait.
3. You’re Deferring Income Tax
In the past, I’ve maxed out my 457(b) in two pay periods. I enjoy a great salary, but typically see a rather large withholding for FICA, federal and state income taxes. By front-loading, you’ll have much less withheld early on. If I wasn’t front-loading, the initial tax withholdings would be more than double.
In other words, by front-loading, I’m putting money into the 457(b) instead of the government coffers. That’s a great way to kick the year off. All will be reconciled eventually; a tax deferred isn’t exactly a tax avoided, but at least my money will be working for me all year long, rather than resting in the hands of the government.
4. You Can Front-Load a 529 Plan
Most of the front-loading opportunities I’m discussing occur annually. You front-load early in the calendar year. This one, however, can be done at the beginning of a child’slife.
Funding a 529 plan for a child is considered a gift. Gifting beyond $14,000 per parent is generally subject to a gift tax. The IRS makes an exception for 529 Plans and will allow you to gift up to five years at once into a 529 Plan. A well-heeled couple can make a one-time grant of $140,000 into a 529 plan. Mrs. BITA has a detailed explanation of Superfunding a 529 in this post.
If you live in a state that gives you a tax deduction for 529 funding (check the map here), you may want to give up to the max allowed, then wait to give more until the next year. If your state offers no such deduction, and you can afford to do it, $140,000 at birth with 18 years to compound would be worth $280,000 with 4% returns and $560,000 with 9% returns (Thank you, Rule of 72). Your child will thank you later (onewould certainlyhope).
5. Because You Can! Unless You Can’t.
How amazing is it to be in a position to front-load large sums of money? If you’re considering a front-loading strategy, that means you can afford to invest thousands of dollars in a matter of weeks or months. As a resident, you might not havehad enough left overto invest even a few thousand dollars over the course of the year.
Take advantage of your much higher salary and get your dollars working for you as soon as possible. Unless, of course,front-loading canhurt you.
A couple of years ago, I read up on the concept of front-loading and its caveats. I was advised that it was wise to check with Human Resources before front-loading a 401(k) because it could interfere with any company match.
I did what I thought was due diligence and asked if I would still receive the match if I contributed the full $18,000 to my 401(k) early in the year. I was assured by the plan administrator that I would, indeed.
I set my contributions to “ludicrous percentage” and maxed it out in two or three pay periods. Each pay period, I got a small match. The first pay period that I did not contribute, I received no match, despite the fact that my employer had come nowhere near meeting their matching obligation, and I had contributed 100% of what was allowed by law.
After a little back and forth communication with HR, I was assured I would receive a true-up contribution 12 months later to reconcile the remaining employer match.
Technically, the plan administrator wasn’t wrong — I dideventually receive the full match, but more than 80% of it was delivered the following calendar year. Interestingly, when I received the rest of the match in February of 2016, the markets were actually down from the prior year when I was expecting the money. Better to belucky than good.
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Do you front-load any of your investments? Why or why not?
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Quick? Pertaining to number 3, a bit confused.
Could you enlighten me about how frontloading woud decrease withholdings?Reply
Sure. In the first couple months, the bulk of my pay goes straight to the 401(k) and 457(b). No tax is withheld on the amount of those contributions.
For example, if I expect a gross of $10,000 per pay period and put $6,000 into a tax-deferred plan, tax is only withheld on the $4,000 that’s left. So withholding will be in the neighborhood of $1,300. Later in the year, withholding will be over $3,000 per pay period. It will all be squared up by year’s end, but I put more in my accounts and less in the government’s coffers in the early months of the year. Any returns from those funds will be mine to keep.
Best,
-PoFReply
The idea of front loading was unknown to me until I read the Mad Fientist’s take on it a couple of years ago. Before that I used to calculate my 401k contribution percentage to precisely so the last paycheck would make it to the $18,000 max. What a fool I was.
While I can’t contribute enough to max it out in January, I can get the max in about 4 or 5 months now depending on any bonuses. I try to get our Roth IRA’s done in that time span as well. Feels good and you’re right it really does keep you from having to maintain a budget.
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Great Post. I complete my Backdoor Roth on January 1st, and place 100% of my paycheck into my 401k until it is full (there is no company match). If you’re investing for the long term, what happens over the year (even if it happens to be a down year) shouldn’t really matter in the scheme of a 10-20+ year investing horizon.
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Strong work, LFMD.
I agree with the last statement, and don’t worry too much about the ups and downs. I read on another site that front-loading always wins, so I felt a need to present the fact that sometimes it doesn’t. The odds are with you, though, so if you’ve got the means, front-load away.
Cheers!
-PoFReply
The first week of January I fund 2 backdoor Roth IRAs at Vanguard, and fully contribute to an HSA. I use my own HSA since I can invest in a Vanguard ETF (instead of the crappy payroll deduction one my employer uses, sure I pay the FICA and medicare but have very low fees and invest 90% of it in the ETF VB through HSA bank/TD ameritrade).
In March I invest 100% of my paycheck to fund my 401k all at once, also in March I get the match plus profit share…so I then take the total and transfer it all at once to Schwab Personal Choice Retirement Account (PCRA) and invest it all at once to a Vanguard ETF (BND or VTI)…doing it at once I then only pay one purchase fee per year, about 7 dollars or something.
Front loading just gets it out of the way which I like…set and forget.
529s…my 5 and 7 year old each have 50K in there….not sure I’m going to keep contributing since I get no tax deduction…may be better off putting money in taxable account and tax loss harvesting to pay to college….
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We frontload when possible too, and when we’ve reached the $18K and our SSDI income limit, it seems like we got a huge raise!
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I max out my 401(k) and this year I’ll be able to max out the Roth IRA and hopefully my HSA, but I don’t make the salary to be able to front-load it.
But if I was making the money, I think that’s a path that makes sense on a lot of levels… very interesting way to do it!
— Jim
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We just had a discussion on what’s better DCA vs. front-loading – so posted your article. Good timing. I did my Roth for the year. This article reminded me to find out if I need to DCA to get the employer match + contribution for my 403b.
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See AlsoWhat is Dollar-Cost Averaging? (And How it Can Help You Manage Investment Risk)The Investment Strategy That Makes Your Life Easier - A Wealth of Common SenseRecession-Proof Your Portfolio: Smart Investing Strategies for Women - HerconomistWalking Up the Escalator: How Dollar Cost Averaging Takes the Guesswork Out of InvestingWe have also started front loading our debt-paydown. Our student loan payment is due on the 18th, and I used make our extra payment on the 18th too, using money from the mid-month paycheck. This is not efficient, since Student Loans Interest is calculated on a daily multiple (interest rate/365 versus monthly like a credit card). Instead, we now make our extra payment on the 1st, skipping 18 days of interest, using money out of our reserve checking account. While this draws down that account to below “acceptable” levels, which I define as keeping the account funded enough to clear the rent check, we can use MMM’s “springy money” and cover any emergencies in the 2 weeks between paychecks with a credit card or our small emergency fund.
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good article – interesting, where I work, the 401K match use to be a lump sum and was payed out early in Jan only if you were employed through Dec 31 of the prior year (it was somewhat of a front load for me, or a rather sizable contribution at the start of the year, no way near the max, but more then I would be able to contribute at one time, so it was very much welcomed) – now supposedly based on employee feedback (??), they have opted to contribute per pay period touting the benefits of cost averaging – – IDK, I’m a bit cynical, I’m thinking somehow this helps their bottom line – – I’m a bit disappointed, but not too much, as either way it’s free money and I suppose I should appreciate any match 😉
I’m doing what I can, got contributions going to both 401K, 457(the misses), Roths, 529s – -would love to be able to front load a bit more, just not pulling in Dr money (just yet) 🙂
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We front load our Backdoor Roth’s every year. I haven’t looked into front loading my 401k yet, mainly because almost all of my paycheck is going towards paying off student loans. Once that’s gone I might give it a look see.
I’m a big fan of lump sum investing rather than DCA-ing. I actually wrote about it on my blog a few months ago. You come out ahead the majority of the time by going all-in. There’s actually an interesting Vanguard article that analyzes this.
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Nice stuff, PoF. And I generally agree that the earlier your dollars get into the market, the greater your expected total returns. True fact.
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Afraid I’m missing the boat on the front loading. I’ve always liked the “dollar cost averaging” peace of mind, even tho I KNOW front loading wins more often than not. I just get too stressed thinking about market timing risk. Stupid, but it’s worked for me for 30+ years, so I think I’ll ride this horse until I leave the rodeo in 18 months!
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I hear you, Fritz. I don’t like to “time the market” but in some ways it’s inevitable.
Choosing to DCA when you have the means to front-load could be considered market timing, probably more so than investing as soon as the money’s available (i.e. front-loading).
Cheers!
-PoFReply
I have front loaded IRAs and 529s the last 2 years. This year I will continue with the IRA but am debating the 529 as I lost any sort of state match when I moved to California….
Nice post- front load away. Regarding the 401K, it would be nice to do but that is a big chunk of cash.
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True, it is a big chunk. You could stretch it out over a few months, and still reach the max by springtime, which is still a way to front-load.
Cheers!
-PoFReply
I love frontloading! I try to always fund my Backdoor Roth IRA January 1st. In 2015 and 2016 I front loaded my 401(k) because it didn’t affect how much match I got from my employer and then I could do the Mega Backdoor Roth IRA too. In the years before that though, I didn’t front load because my employer did a per paycheck match with a true up and I didn’t want to feel committed to waiting for the true up.
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That’s great, Leigh! The Mega Backdoor is a great option for those who have it available.
Cheers!
-PoFReply
I haven’t had the opportunity to frontload just yet, but it’s something we’ll likely do once we have the disposable income coming in (we don’t quite have the funds yet given Dr. FP’s meager $0 per year salary).
The main advantage I see in it is just getting the money out of your hands fast. Makes it harder to waste it later.
One thing, frontloading to me has always seemed just as another form of dollar cost averaging. (investing once per year instead of once per month or 26 times per year). Obviously, the sooner you get the money in, the better, but just something I’ve always thought when I hear the arguments for it.
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I remember reading about the differences between DCA and periodic investing. DCA means that you actually have a lump sum readily available to invest but space out the transactions over time. However, periodic investing means that you put in money as you get it over time (like taking a portion of your paycheck towards your investments). More of a semantics argument, but I recall that people at Bogleheads get riled up over these arguments.
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True, and I do both. Periodic investing in a taxable account as the paychecks come in, and as much front-loading as makes sense.
If you are in a position to choose front-loading, you essentially have a lump sum available (or will over the course of a few pay periods), so choosing not to front-load could be consider DCA, even if it looks like periodic investing. Or maybe they are the same thing in this instance.
Best,
-PoFReply
I’m new to the concept of front-loading investments, but I like this idea! I’m very much a “get it done today and don’t worry about it tomorrow” sort of gal, so this is right up my alley. It also means you prioritize savings first instead of falling prey to daily distractions that prevent savings. I do think it’s more difficult to front-load if you still have debt. But if you’re able, there are real tax benefits to consider.
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We don’t really front load much, due to the way the match works out on our 401k. However, we did front load the kids 529 plans, mainly with the intent that at some point we will stop contributing to them. They need to be big enough that they will still grow to a usable amount by the time the kids may or may not need them.
We do ahve a lot of cash sitting around we want to do somehting with, but we haven’t decided what to with it yet. It’s tempting to dump it all into index funds and call it good, but then there’s that whole “what’s the market gonna do” attitude that’s kept us from doing that so far. What to do, what to do…
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Yeah, that cash is a conundrum, given high P/E & CAPE, climbing interest rates, etc… Sometimes not timing the market is timing the market. It really can’t be avoided.
It could be worse, of course. You could not have a lot of cash sitting around. 😉
Cheers!
-PoFReply
Another benefit of front-loading is you will get more dividend payments from that money over the year. I’ve always done DCA and set my accounts on automatic as that is what I did when I started many years ago. In hindsight, I would have done better with my IRA by front-loading it more every January. Putting it in every year is probably the important thing. And Ill agree that market timing rarely works in your favor not to mention any time spent or worrying over the decision.
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I was going to make the same comment, wouldn’t this mean in a “flat” year you would actually come out ahead by front loading?
In a year with low volatility and a graph that looks like something out of Flatliners, front-loading will be no better or worse than investing throughout the year.
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Right on, PoF, that’s a great suggestion! I include an excellent research piece by Vanguard with simulations of lump-sum vs. DCA investments. As you indicate, the lump-sum beats the DCA approach on average.
We usually fund our after-tax IRAs early during the year. Not all employers offer the true-up in the 401k plan, so we’re bound to spread the contributions throughout the year. One thing we could to is to work backward and calculate how much we could invest in the first month to still capture the minimum contribution for full matching in the rest of the year. But I’m afraid I might miss the deadline to change the contribution and then miss the full matching, so I will leave the 401k contributions as is. 🙂
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Thank you for the comment and the link, Big ERN.
What you’ve outlined is precisely what I am doing this year. I’ll front-load up to about 80% of the $18,000, then contribute 1% per pay period to continue receiving the match throughout the year. The “payoff” will be small if anything, but it’s a fun game to play if nothing else. I can always count on the true-up if something goes awry.
Best,
-PoFReply
For 401k I do not frontload for the reason you mentioned. We did not even have a trueup feature until this year. Like you ours doesn’t pay out until January or February of next year, no thanks.
We do front loader my Roth IRA, it went in on January second. However I did not front loader my wife’s Roth this year for the first time. I’m not clear on how much she will make in side hustle. As such I cannot determine her eligibility in respect to her income.
Time in the market, and eliminating your ability to spend the money have a lot of value if these hurdles are not in your way. Look before you leap.
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If we didn’t have the true-up, heads were going to roll! It’s not like I didn’t ask before front-loading my 401(k)!
Sounds like you’re making responsible choices, FTF.
Best,
-PoFReply
Assuming that you and your wife file Married Filing Jointly, the eligibility for IRA contributions is based on your combined income. So if you combined have more than $11,000 in earned income, then you can both make Backdoor Roth IRA contributions.
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I would add, with respect to any ROTH contributions, to be sure you can re-characterize them at year end if wanted. I made some Roth TSP (military 401K) contributions in January-March last year. However, a small amount of additional income pushed us up into the next tax bracket and lifted our AGI above the saver’s credit level. Because the TSP doesn’t allow ROTH to TRAD re-characterization, we lost out on a hefty tax credit. This year I have a better idea of our tax situation but will still contribute any to any IRA’s pre-tax. We will roll over to a ROTH at year end once all W-2’s are in if we determine this is tax efficient.
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You’re mixing up your terminology here. I don’t know of a 401(k) that allows recharacterization of contributions after they have been made. By “roll over to a ROTH at the end of the year once W-2s are in” confuses me – I’m not sure you can do what you are talking about.
1) W-2s usually come in January of the following year, at which point you are in a new tax year.
2) Usually you can’t do an in-service withdrawal of pre-tax 401(k) contributions. I assume this limitation applies to the TSP as well.
3) Conversions, i.e. transferring funds from a Traditional account to a Roth account, are taxed based on the day they are performed. So if you wait until you get your W-2 to do this, you would have missed your opportunity to convert in your desired tax year.
4) Not all employer plans allow you to convert Traditional funds to Roth status within the plan. Does the TSP?Thanks Leigh, I should have been more clear. My 401K contributions could not be re-characterized of course: now that I know this I plan on only using IRA’s for fund I may wish to re-characterize, rather than any 401k contributions (my mistake last year).
I think my basic point still stands : don’t make any Roth contributions you might want to change for tax purposes unless you are sure they can be converted.
1) See 3
2) True
3) Good point- I did not realize how a ROTH conversion would be taxed in a post-January conversion- more research needed as this is my first year having this problem. Since I do an decent job tracking my income, I don’t need my W-2’s and can guess my taxes in late December. I think any ROTH to TRAD conversions should happen in December then if I read you correctly? – Thanks for the clarification!
4) As far as I know the TSP does not allow TRAD-ROTH conversions either.More research- For IRA’s I understand that re-characterization may be made post Dec 31 and still count for the prior tax year:
“To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the tax year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. If you recharacterize your contribution, you must do all three of the following.”
https://www.irs.gov/publications/p590a/ch01.html#en_US_2016_publink1000230671However, I fear this is far too into the weeds for the purpose of this comment stream… apologies to all.
That makes more sense! And agreed – that’s definitely a problem with front loading. On the opposite spectrum, I know many people who made Roth IRA contributions without knowing about the income limitations.
On 3 – I think you can recharacterize your contributions to the other type (i.e. Roth to Traditional or Traditional to Roth) up until the tax filing deadline? Don’t quote me on that. Whereas conversions would be taxed based on the date the conversion happened, so you would want to do them in December. My guess is you are more interested in possibly recharacterizing your contributions than converting them, though I would look into which one is more useful in the situation.
I front load everything too to get my investments into the market for a long as period as possible before I ever need to withdraw.
Does your group contribute into a 401k as a percentage of your 457?
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We get a match and profit share into the 401(k).
Matching in a 457(b) is rare, but not unheard of.
Best,
-PoFReply
We don’t front-load our 401K’s or HSA or 529’s. Really based on the fact that automated monthly payments are extremely convenient for a very busy pair of working parents. This time of year, my restricted stock vests and following month, performance bonus is paid out. Both are moved directly to Vanguard across the various (mainly equity) funds we own. Likewise for Mrs. PIE bonus and stock options which are paid out May/June time frame.
Thus we DCA and also front-load various funds early in the year and mid-year. A satisfactory middle ground, I think, which works for us.
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I agree, PoF. Time in the market usually wins out. As for a volatile year, I wouldn’t worry about it if you are consistently front loading your investments over a long period of time. Plus, it’s just nearly impossible to time the market. Everyone thought the market would drop significantly if Trump won the election. It did for a few hours, but then shot up to new highs. We may see some volatility early on as he roles out his policies, but over time earnings will win out and we’ll see the market continue an upward trend.
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See AlsoBest Financial ArticlesTrue, you can’t worry about what will happen next — the future is unknowable. I just wanted to point out that front-loading isn’t always a winning strategy. But it is more often than not, which makes it a good bet to take.
Cheers!
-PoFReply
Dollar cost averager here…. would front load if we could but don’t have the incomes yet. Like Mr Swan our match is per pay period, so we will continue to spread that out over the full 26 weeks.
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As your income grows, you can expect to have more opportunities to front-load. Maybe you could take all that self-employed blog income and make it work for you every January. 🙂
Cheers!
-PoFReply
Even if you cant truly front-load, you may be able to do slightly better than just contributing monthly a-la DCA. For example, can you meet your $18,000 401 (k) in only 9 months? That’s 2k a month more, which front-loads you into the market a full 3 months earlier for only $500 a month.
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My 401k plan states the company match is per paycheck so no front loading for me on that one.
I read an interesting article that people tend to contribute to post tax accounts during tax time, and how if you front load in Jan your money has more time to work for you. I know bonuses happen in my industry around March or April and I often use that for my Roth because it’s not money that is spoken for. For other people doing their taxes is a kick in the pants to contribute because they don’t think about money muck the rest of the year. I still figure spring time is earlier than December. The biggest win is that we are saving / investing, right?Reply
Right. Pay yourself first. More time in the market… all good things.
Best,
-PoFReply
You can still front load in this scenario by contributing a higher percentage for earlier months and then throttling down to the minimum % needed to get company match for the remainder of the year so that at end it adds up to 18k.
For example last year at my work i did something like 30% contribution rate for first 11 pay periods and then ratcheted down to 6% (the min needed to get full company match) for the remaining 15 pay periods.
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As others noted, I’m not making ‘Physician Money’, so I’d have to really work the numbers to save right to be able to do a partial front load. In the grand scheme of how much capacity my brain has for stuff and the unexpected the universe likes to throw at me, I’m good with DCA per paycheck.
I also like the flexibility to drop my contribution % if I really needed the funds. I’ve never done it, but it’s a safety net.Reply
This is the first year I’m front loading my 401k. After reading articles like this one and articles from the Mad Fientist – I’ve convinced myself it is the way to go. 75% of may paychecks are currently going towards 401k contributions! I’m trying hard to not dip into savings to pay the bills, so this strategy has the added benefit of putting some serious pressure on me to spend much less over this time period.
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Congrats! Paying yourself first tends to force you to make do with a more meager payday. I build up a cash cushion towards the end of the previous year to allow for some front-loading.
Cheers!
-PoFReply
Great article! We are actually in the process of doing this for the first time – mainly because my wife will probably ‘retire’ early this year (38 years old) and we are wanting the entire amount in her 401k before she quits. Wish we did this every year – will become the new norm around here for sure – great timing for an article! (ps I heard front-loading washers have more maintenance issues than traditional top loaders!)
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Congratulations to Mrs. A (and you, Jon)!
I’ve had to replace the giant rubber gasket after our washer started leaking water into the basem*nt. YouTube walked me through it. #DIY
Cheers!
-PoFReply
I would love to front-load our investments. We do when it’s possible, but mostly we aren’t able to max everything out in a few paychecks. Damn it, I wish I had gone to med school 😉 We are doing our best to get as much money as possible into our daughter’s 529 plan while she’s still really young, so it has more time to grow, essentially, front-loading.
I think the general conception is that DCA is best, but when you look at the numbers – it really is a misconception. Awesome post!
Mad Money Monster
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Thank you, other MMM!
You’re doing what you can, and planning for your daughter’s future, which is pretty great.
Cheers!
-PoFReply
I front-load my 401(k) in order to contribute to my after-tax 401(k) after to take advantage of the Mega Backdoor Roth at my company.
The unfortunate thing is that HR doesn’t match the entire amount and only gives me a portion, but my match is very little to begin with and requires at least three years to vest, so I’m okay with losing out on a little bit.
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Awesome that you can do the Mega Backdoor, SP. My plan doesn’t offer it, at least according to the last administrator. I would be wise to check again.
Thanks for the thought!
-PoFReply
Interesting strategy…too bad I’m no longer earning that pre-tax income to contribute to those savings plans.
Given the “Trump volatility” we’ve seen so far this year, it’s hard to say if this strategy is really going to work out or not. The year has only just started!
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You, Mr. Tako, have front-loaded your life savings.
That’s essentially what FIRE is. Front-load your retirement savings in your early working years. Then live however you see fit once you’ve hit your number.
Cheers!
-PoFReply
Agreed re: front-loading your 401(k) and IRA accounts. I would mention one possible exception: HSA contributions. I would contribute to an HSA via payroll deduction, because you can deduct Social Security and Medicare taxes. You cannot deduct Social Security and Medicare taxes if you front-load your HSA contribution by contributing outside of your employer’s payroll deduction.
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Another great caveat to know. Thank you, WaSP!
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I just checked my employer’s HSA contribution rules. I can change my HSA contribution amount outside of open enrollment, allowing for front-loading. However, every employer may have different rules. Also, if you contribute to an HSA outside of employee payroll deduction, you will not get the Social Security/Medicare tax break. Sorry for the confusion.
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Wait a sec, I’m confused (not unusual)
By contributing to HSA, I can get SS and Medicare deduction? What? All I see in my paycheck is healthcare, dental care, and pretax 401K contribution as pre-tax deduction.
What am I missing?
HSA contributions are not subject to federal income or FICA (SS + Medicare) tax if done via payroll deduction.
From the IRS:
“Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.”
Cafeteria plan is contributing via payroll deduction. I’m no tax expert, but hopefully this helps.
Does this still hold true if you front load an HSA by payroll deduction? For me, I usually get about 10k per pay period. If I set my first annual paycheck to withhold 6.5k into my HSA, I would still get full SSI /Medicare tax deductions right?
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You are correct. I just checked my employer’s benefits site, and I can change HSA payroll deduction outside of the open enrollment period. But each employer may be different.
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Good points to be aware of, thanks for the clarification!
I’m a front loading machine as well! However my company 401k match is quarterly based on my contributions in that quarter so I practice patience with that.
My state got rid of the tax incentive on 529 plans the year my kid was born… So I’ve been downloading that and should be done with contributions by the time he turns three. Always great to get the max benefit of those tax incentives!
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Nice work, Green Swan!
Gotta be careful with the 401(k) match, as I’ve learned.
Our state doesn’t have a 529 incentive, either. Hasn’t stopped us from contributing, but we certainly haven’t superfunded them, either.
Cheers!
-PoFReply
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