This 401(k) plan feature is a 'green light to contribute passively,' advisor says.

• Without the "true-up" feature, you may miss out on part of your employer's matching contribution if you max out your 401(k) plan early in 2025.
• If you max out your employee deferrals before year-end, your company will true-up its 401(k) match.
• In 2023, a survey by the Plan Sponsor Council of America found that 67% of 401(k) plans that offer annual matches had a true-up.

If your 401(k) plan doesn't have a "true up" feature, you may miss out on part of your employer's matching contribution if you max out your plan early in 2025.

To obtain your employer's full 401(k) plan match, you typically need to save a specific percentage of your income from each paycheck into your company's retirement plan. If you contribute the maximum amount allowed in employee deferrals before the end of the year, the true-up feature will deposit the remaining portion of your employer's 401(k) match.

An extra payment made to an employee's 401(k) account to meet the employer's annual matching requirement is known as a true-up. This payment is made when the employer's total matching contributions at the end of the year fall short of the plan's requirements.

Jon Ulin, managing principal of Ulin & Co. Wealth Management in Boca Raton, Florida, stated that it's a green light to contribute aggressively in January, maximizing market exposure from day one.

In 2025, retirees will see changes in Social Security and Medicare. Biden withdrew student loan forgiveness plans, but there is still debt relief available.

A penalty 'for maxing out too early'

According to a 2023 study by Vanguard, lump-sum investing allows for more time in the market, which can increase growth potential.

It's crucial to comprehend your 401(k) plan before contributing heavily, as not all plans include a true-up feature, experts advise.

In 2023, a survey by the Plan Sponsor Council of America found that 67% of 401(k) plans that offer annual matches had a true-up.

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.

If you are under 50 years old, earn $200,000 annually, and your employer offers a 5% 401(k) match without a true-up.

If you contribute 20% to your 401(k) plan with 26 pay periods, you will reach the $23,500 deferral limit for 2025 after 16 paychecks, but you will only receive about $6,200 of your employer match. In this scenario, you will miss approximately $3,800 of your employer 401(k) match by maxing out early without a true-up.

Reilley advised checking the 401(k) summary plan description for important details.

Higher deferrals, catch-up contributions for 2025

In 2025, employees can defer $23,500 into 401(k) plans, and those age 50 and older can make a catch-up contribution of $7,500. Starting in 2025, the catch-up contribution for savers aged 60 to 63 will be $11,250.

Numerous investors struggle to fully fund employee deferrals due to competing financial demands.

Nearly 14% of employees fully utilized their 401(k) plans in 2023, according to Vanguard's 2024 How America Saves report, based on data from 1,500 qualified plans and nearly five million participants.