If you’re eager to max out your 401(k) plan early in 2025, you could miss part of your employer’s matching contribution if the plan doesn’t have a special feature known as a “true-up.”
Typically, you receive your employer’s full 401(k) plan match by saving a certain percentage of your income from each paycheck into your company’s retirement plan. If you max out employee deferrals before year-end, the true-up feature deposits the rest of your company’s 401(k) match.
Basically, a 401(k) true-up is an extra payment to fulfill an employer’s annual matching amount to an employee’s savings. It’s done when the employer’s total matching contributions at the end of the year are less than the plan requires.
“It’s a green light to contribute aggressively in January, maximizing market exposure from day one,” said certified financial planner Jon Ulin, managing principal of Ulin & Co. Wealth Management in Boca Raton, Florida.
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A penalty ‘for maxing out too early’
Lump-sum investing, or putting larger amounts of money to work sooner, maximizes time in the market, which can increase growth potential, according to research from Vanguard released in 2023.
But it’s important to understand your 401(k) plan before front-loading contributions, because not all plans offer a true-up feature, experts say.
Roughly 67% of 401(k) plans that offer matches more than annually had a true-up in 2023, according to a yearly survey released by the Plan Sponsor Council of America in December.
Clients have been “penalized for maxing out too early” without a true-up, which meant “leaving money on the table,” said CFP Ann Reilley, principal and CEO of Alpha Financial Advisors in Charlotte, North Carolina. She is also a certified public accountant.
For example, let’s say you’re under age 50, making $200,000 per year, and your company offers a 5% 401(k) match without a true-up.
With 26 pay periods and a 20% contribution rate, you’ll reach the $23,500 deferral limit for 2025 after 16 paychecks and only receive about $6,200 of your employer match. In this case, you’d miss roughly $3,800 of your employer 401(k) match by maxing out early without a true-up.
You can learn more by checking your 401(k) summary plan description, which outlines key details about the account, Reilley said.
Higher deferrals, catch-up contributions for 2025
For 2025, employees can defer $23,500 into 401(k) plans, plus a catch-up contribution of $7,500 for investors age 50 and older. Starting in 2025, the catch-up contribution rises to $11,250 for savers age 60 to 63.
Of course, many investors can’t afford to max out employee deferrals amid competing financial priorities.
Only about 14% of employees maxed out 401(k) plans in 2023, according to Vanguard’s 2024 How America Saves report, based on data from 1,500 qualified plans and nearly 5 million participants.