Corey Grusden home

Maxing out your 401k early in the year

When I was in my early 20’s, a guy I worked with was smart as shit about finances and told me to max out my 401k as quick as I could in the beginning of the year since it would have the rest of the year to grow. The idea being, you could get $14,000 into the 401k in the first 4 months, you could have 8 more months potentially of bigger gains off $14,000, instead of putting $1,000/month and losing out to compound interest over a longer period of time.

I was single, no dependents, etc… So I listened to him.

I was making about $1,000/week. After taxes, because I was single and claimed zero dependents on my W4, I was taking home about $600-700/week. After making a 40k1 contribution of $300, that left me $300 in my pocket for the week. The job doesn’t take the 401k contribution out first, pre-tax, and then calculate the taxes I have to pay. The IRS does that at the end of the year. The job didn’t care about keeping the books for me. So I had to get smart about the taxes that the job is taking out first, before making my 401k contribution.

I went to HR and filled out my W4 and claimed a dependent or a couple of them, actually. I think 9. Now, my job wasn’t going to take any taxes out of my paycheck. I’d have to clear that up at the end of the year with the IRS.

Now, when I got paid, I got the full $1,000/week untouched by taxes. That meant, I could set my 401k contributions to double, or triple, what it was prior. I could put $600 or $900 a week into my 401k. Which meant it would fill up my 401k extra fast.

At the end of the year, I’d usually end up paying taxes, but it wasn’t much since I had put away so much pre-tax into my 401k. The IRS is OK with that. The W4 is for the job to withhold the right amount of taxes because most people would put themselves in a bad spot since most people are not savvy enough.

Last point, when I filled up my 401k for the year, I went back to HR and modified my W4 back to normal.