401(k) contribution timing and preformance, redux

#2 01-08-2006, 09:38 PM

Mark Freeland wrote:
- quote -

> Chris Cowles wrote:
> > Can you make 401k contributions outside of a paycheck deduction? Can I
> > simply deposit a check on 1/1, as long as my total earned income at the
> > end of the year is sufficient to justify the total contribution at the
> > beginning?
> No, because 401(k) plans are salary reduction plans. You agree with
> your employer to take a reduced salary in exchange for an equivalent
> contribution to a pension (401(k)) plan.
> "A 401(k) plan is a fancy term for a salary reduction plan."
> http://library.thinkquest.org/3298/doc/ret401k.html

If you employer and your plan administrator are agreeable to it, you can
contribute 100% of your January paychecks to your 401(k) plan, and then
set the contribution level to 0% in February or March for the remainder
of the year. The reason the company might not let you do this is they
don't want to keep up with whether your cumulative contribution for the
year is higher than your annual maximum.

Best regards,
Bob

#1 01-08-2006, 08:48 PM

Chris Cowles wrote:
- quote -

> Can you make 401k contributions outside of a paycheck deduction? Can I
> simply deposit a check on 1/1, as long as my total earned income at the
> end of the year is sufficient to justify the total contribution at the
> beginning?

No, because 401(k) plans are salary reduction plans. You agree with
your employer to take a reduced salary in exchange for an equivalent
contribution to a pension (401(k)) plan.

" A 401(k) Plan is a defined contribution plan that is a cash or
deferred arrangement. Employees can elect to defer receiving a portion
of their salary which is instead contributed on their behalf, before
taxes, to the 401(k) plan."
http://www.dol.gov/dol/topic/retirem...pesofplans.htm

"A 401(k) plan is a fancy term for a salary reduction plan."
http://library.thinkquest.org/3298/doc/ret401k.html
--
Mark Freeland
nNeEwTs[at]sonic.net

01-08-2006, 07:25 PM

"Mark Freeland" <nNeEwTs[at]sonic.net> wrote in message
news:43C1402D.3226[at]sonic.net...
- quote -

> There is indeed a significant difference between the two strategies. T.
> Rowe Price recently reported on this question, as well as the related
> question of whether case B beat the inverse of case A - accumulating the
> 26 payments into a MMF, and then lump sum investing at the end of the
> year, rather than at the beginning. The only substantial difference
> between the Price study and the question asked by IndyPeter was that
> Price studied monthly, rather than fortnightly, contributions.
> Rather than describe the full set of assumptions and methodology, I
> refer you to the report:
> http://www.troweprice.com/gcFiles/pdf/prfall05.pdf (See pp. 10 et seq.)
> Bottom line - 74-79% of the time, strategy A beat strategy B, including
> the interest earned on the MMF waiting for investment.

Can you make 401k contributions outside of a paycheck deduction? Can I
simply deposit a check on 1/1, as long as my total earned income at the end
of the year is sufficient to justify the total contribution at the
beginning?
--
Chris Cowles
Gainesville, FL

#-1 01-08-2006, 03:39 PM

In news:IndyPeter.1yrh6p[at]news.investmentbanter.com
(http://groups.google.com/group/misc....7027c9153b35d7),

IndyPeter asked:
- quote -

> Does anyone know how to calculate a theoretical rate of return, say
> based on the S&P500, of regular contributions to a 401(k) comparing
> "front loading" the contribution at the beginning of each year vs
> regular payments spread out over the year? For example, lets say one
> contributes $14,000 per year to a 401(k). In case A one makes the
> contribution each January in full. In case B one makes the
> contribution in 26 installments of $538.46. What is the difference in
> accrued amount over 20 years (using S&P500 data)? Is there a
> significant difference in strategy A vs B?

There is indeed a significant difference between the two strategies. T.
Rowe Price recently reported on this question, as well as the related
question of whether case B beat the inverse of case A - accumulating the
26 payments into a MMF, and then lump sum investing at the end of the
year, rather than at the beginning. The only substantial difference
between the Price study and the question asked by IndyPeter was that
Price studied monthly, rather than fortnightly, contributions.

Rather than describe the full set of assumptions and methodology, I
refer you to the report:
http://www.troweprice.com/gcFiles/pdf/prfall05.pdf (See pp. 10 et seq.)

Bottom line - 74-79% of the time, strategy A beat strategy B, including
the interest earned on the MMF waiting for investment.
--
Mark Freeland
nNeEwTs[at]sonic.net

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