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Max Out your 401k Early in the Year for Better Returns?

Last updated by on February 29, 2016

I was recently approached by a longtime reader with a seemingly random question,

“Is it better to max out your 401k each year as soon as possible?”

Upon digging a little deeper, I found out that a friend of his had been maxing out his 401k as soon as he possibly could and was recommending to him that he do the same (versus dollar cost averaging over the entire year).

The friend’s theory was that since the stock market trends upward over time, if you were to max out your contributions and invest them as soon as possible each year versus spreading them out or contributing more later in the year, then you would be able to capture better investment returns over time.

I read thousands of financial articles each year and had never seen one argue in favor of this strategy and I told the reader as much.

max out 401k early in yearBut something kept pulling at my curiosity since that exchange. I get an awesome 50% of my contribution 401k match from my employer (up to the max), so I have made the maximum 401k contribution for a number of years now. Was it in my best interest to max out my 401k as soon as I possibly could each year?

I dug a little deeper to find an answer.

I compared the S&P 500 stock market index levels in the first half of the year to the second half of the year for each of the last 25 years (1989 – 2013). I didn’t want to simply compare start of year to end of year because it is extremely rare that a maximum contribution would come in one giant lump sum right at the start of the year.

I noted whether the market index was noticeably higher in the first half of the year, second half of the year, or was approximately a push. What I found was:

  • 1st half higher: 1990, 1992, 1998, 2001, 2002, 2008, 2011, 2015 (8 total years)
  • 2nd half higher: 1989, 1993, 1995, 1996, 1997, 1999, 2003, 2006, 2007, 2009, 2010, 2013, 2014 (13 total years)
  • push: 1991, 1994, 2000, 2004, 2005, 2012 (6 total years)

Not the largest sample size, but almost a 2-to-1 ratio of higher 2nd half versus higher 1st half index levels is pretty compelling.

With the 2nd half of the year being higher than the first, theoretically, the more you invest in the first half of a year, you would be able to capture more gains on your contributions for that year, over time. Every little gain adds up.

Sure, there is some context missing here, but it does provide some validation to the theory. Will the same kind of results hold true over the next 25 years? Nobody knows.

Investment return gains aside, I think there is another compelling reason to max out your 401k contributions earlier in the year if you can.

If you are at an employer with an appealing 401k match that vests immediately and is based off of your personal contribution (vs. salary) and you can afford to max out sooner, it might be to your benefit. If your job status changes (i.e. you get laid off) or you go to a new employer with a lesser 401k match, that means less free money for you.

Even if your match is so-so or non-existent and you are in a situation where you fear your employment may be in jeopardy, it is in your best interest to get as much of a match as you possibly can and also to be able to contribute more of your own funds towards retirement.

Of course, you have to be able to afford the lower paychecks until you max.

Something to think about.

* Note: this strategy does not universally work for every 401K plan. Some employers contribute a percentage of your total salary vs. a percentage of your contribution and set caps on how much they will match per pay period. Some employers do not contribute until the end of the year. And some have vesting schedules or other whacky rules preventing you from benefiting if you leave the company. In other words, your mileage may vary. Best to check with your HR department. Also, I’m not recommending this strategy – just highlighting the possibility, if your employer’s plan allows for it.

401k Maxing Discussion:

  • Do you max out your 401k early in the year for investment return reasons?
  • Do you max out early to lock in your 401k match and/or your own contributions?

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Paul says:

    Wouldn’t making the contributions earlier in the year impact your matches?

    Example: My employer (a telecom) plan states that “the company match will be 100% match up to first 1% contribution and 50% match up to the next 5% contribution for a total match, if you contribute 6%, of 3.5%.”

    I always assumed that 6% (to get a full match) was based on each pay period and not annual salary. With that logic if I hit my max contribution in January then I’ll lose on the matching throughout the remainder of the year.

  • JP says:

    This works even better for IRA’s! You can dump all $5500 on Jan 1 and have growth on all of it throughout the year. Although, there’s obviously no benefit if you’re just transferring investment money from outside of the IRA to inside.

  • I asked my employer about whether the company would match if I maxed out my 401K early. Answer is no. I would actually get the match later, when they did a retroactive calculation of how much you invested in your 401K. Usually around February the following year.

  • Tommy D says:

    Quick question on this…I receive 100% up to 5% for my match. If I max out early in the year, I will not be contributing the rest of the year, therefore, I will be forfeiting my match for the rest of the year, correct?

    • Sam H says:

      You are correct. My company specifically warns against this. The match is applied per contribution. Maxing out your 401k in your first contribution means you would only get that match once. So this strategy is very bad for people whos matches work like ours (which i think is most).

      For people who dont have a match, you are simply arguing time in market vs DCA. There is a lot of debate around this but i believe that the consensus is that you should invest regularly as much as you can afford. If you can afford to max out your 401k in 2 months then go for it, then continue to invest that amount elsewhere after you have maxed and you will probably be doing alright for yourself.

      • Natalie H says:

        You are all correct. It really depends on your plan. My employer’s plan keeps track of how much has been contributed for the year and will still do the match regardless of when you contribute, but the distributions are still made quarterly and you must still be employed. So, although my contributions will be invested early, my match will not come any earlier than if I spread it over the year, but I still receive it. Not all plans work this way.

    • Fred says:

      Tommy D and Sam H are correct. Mr Miller is not. There is an explanation here.

      Ask your benefits department if they have a “true-up”.

  • Kevin says:

    If your employer matches thoughout the year, it is best not to max($17,500)early in the year, but to do a calculation to ensure you max, and you employer matches. Example:

    Salary of 52,000/year, weekly paychecks of 1,000, employer matches 100% of first 5% contributed:

    Both you and your employer contribute $50 weekly at max match rate. At the end of the year you and your employer will each have contributed $2,600 over the 52 weeks. Subtract that $2,600 from the $17,500 max, and you can contribute $14,900 at the beginning of the year, and still get max employer match.

  • G.E. Miller says:

    To address some of the comments – just to be clear, this strategy does not universally work for every 401K plan – not everyone’s employer’s plan allows. Some employers contribute a percentage of your total salary vs. a percentage of your contribution and set caps on how much they will match per week. Some employers do not contribute until the end of the year. And some have vesting schedules or other whacky rules preventing you from benefiting if you leave the company. In other words, your mileage may vary. Best to check with your HR department.

  • If the 401k is your only investing vehicle for the year, then this strategy can make a lot of sense. However, when you consider that there are a lot of other vehicles your should be using as well (IRA, taxable account), then the strategy can lose its appeal.

    I’d personally rather just let the 401k dollar cost average. Sure, you might eek out an extra bit of return, but the main benefits of the 401k is the match and the tax deferral. Aside from that, 401k’s kinda stink. Limited investment choices, and can’t access the money until 59 1/2.

    Investing in a tax efficient manner in a regular tax account is still the way to go (after a ROTH). But if the 401k is your only investment, this isn’t a bad idea.

    Long Term Brian

  • Joe says:

    I have maxed out my 401k for several years as well. But I take a slightly aggressive approach throughout the year, making sure that by October, I have contributed my max. At this point my paycheck grows, just in time for the holidays. I call it my “Christmas Bonus”.

    Never realized that my approach would also have some of the implications discussed above.

  • Gabe says:

    I recently read the book “The only investment guide you’ll ever need”, and the author mentions this technique and recommends to go ahead and contribute as much as possible early on. Hr made a comparison and by the time of retirement, that difference from his estimates on an average return of the market meant a few more thousands of dollars gained.

  • Robert Lewis says:

    What I tend to do is simply put as much in as my employer will match. If my employer matches 6%, I put in 6%.

    But yes, it makes sense that if you add more time to let your investment grow–even if the amount of time you add is only 9 or 10 months, in this case–then you’ll see better returns over time with compound interest, etc. It’s like you get a 9-month jump on the competition.

  • Aldo @ MDN says:

    I think I’ll go with the dollar cost averaging path because there is just not enough evidence to support your theory. Also, my plan wouldn’t work with this strategy. I’m with one of those companies you mentioned in your note. I would miss out on company match if I contribute everything right away. I rather get free money, continue with the dollar cost averaging, and contribute the rest to a Roth.

    But if it works for you and you want to give it a shot, have fun with it.

    • Allen says:

      If your general assumption is that the stock market goes up over time, then yes of course investing as much as soon as you can will be beneficial. For the sake of simplicity let’s start off assuming the stock market advances 12% a year. (plausible, but I also picked it because the math would be easier), and now let’s look at the two extremes. Scenario 1: Invest all of it up front every year.

      Jan 1st 2013, $17,500k in the market. Dec 31st 2013, it has experienced a 12% gain.

      or wait until Dec 31st 2013, invest $17,500… on Dec 31st 2013 it has experienced a 0% gain.

      Clearly money going into the market earlier is better. Now with the slightly more complicated example of investing a 1/12 of 17,500 every month (1,459 a month).

      The first $1,459 experiences a 12% return over the course of the year. The money invested on February 1st only gets 11 months exposure to the market though, so it only gets a 11% return. And so on to the money invested in Dec only gets exposure to one month and only has 1% return.

      So while it is better to do monthly investments than to wait until the end of the year to do a lump sum, it would seem that investing the entirety up front is better.

      You might say, but Allen the market does not behave in a smooth manner, which is absolutely true. If you think the market is extremely overvalued or undervalued that could potentially dramatically alter anticipated return (ie real estate bubble), but all things being even, it is very hard to predict market fluctuations, so it is a reasonable course of action to behave on the long term history of the market and assume a general increase in value over time.

      • Allen says:

        Also, sorry, my comment was more meant as a general reply to the idea of investing money early or late into an investment vehicle. Obviously individual restrictions on the way a 401k is structured would effect the ideal manner in which to invest.

  • S. B. says:

    For many years now, I’ve tried to max out my 401(k) as soon as possible each year and to make any IRA contributions for the year in January. Your one reader is correct: this is just another variation of DCA versus lump sum.

  • Richard says:

    Is one of the reasons that the 2nd half of the year shows more increases because there tend to be more market corrections (down) in the first half of years?

    If that is the case a larger amount of your dollars would be hit with down correcting time frames in bear market years. One could work on a strategy after analyzing most common months of corrections (Jan-April?) and max your 401k between the lowest dip range on average. For example – early in the year keep contribution rate low, go with a very high % mid-year when the dips are most likely based on history and then be maxed before the most common peaks.

    Or just stop trying to time markets and do exactly the same thing based on an individuals plan every year.

    Maybe bogleheads blog has more info on this topic? I’m going to check it out now.

    • Richard says:

      What is happening in the market right now is a great example of the risk to maxing out early in a year – if you had maxed already and the correction continues you are taking the hit with your entire yearly contribution. If there is a rebound in nov-dec and you contributed 1/4 of your yearly 401k limit during the lower priced months your effective yield on the year will be higher compared to the maxing early scenario.

      One question I haven’t seen answered in this thread is:
      If you do not have an employer match and instead have a fixed % added to your 401k by your employer regardless of your contribution % (profit sharing model) is there still a tax advantage of contributing throughout the year vs. maxing early?

  • Gabriella says:

    In “Random Walk” (I think–I’ve been reading too many books lately), they talk about how investing over time rather than in one large sum works out if there was a significant dip immediately after the lump sum was invested. Clearly, this won’t happen every year, but it’s an additional bit of information to consider.

  • Fukumasa says:

    One problem with maxing out too early is that you defer less taxes depending on your marginal tax bracket. This is a difficult concept to understand if you don’t know how you’re taxed per paycheck. To guarantee the most tax savings, I max out the 401(k) in equal amounts throughout the year. I also get the most matching dollars this way.


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