I have learned the hard way no to contribute too high percentage of my income to my 401(k) account when my employer has a matching program. Here is how it happened so you do not make the same mistake. I started out the year contributing 8% to my 401(k) program and was planning on hitting the maximum contribution of $15,000 for the year. My employer matches $.50 per $1.00 up to 6% of my contributions.
Towards the latter part of the year, I reviewed my quarterly 401(k) and realized I was leaving money on the table from my employer matching pogram. I had contributed $12,000 so far in the year and my employer match was only $4,500. I quickly did the calculation and realized my total employer match for the year was only going to be $5,625 instead of $7,500. I immediately reduced my contribution to 6% and was able to get about $7,000 in matching. This means I left $500 on the table that my employer did not have to contribute on my behalf.
So for next year, I will definitely be capping my contributions at 6%. Please note if you do not plan on hitting the IRS 401(k) maximum contribution limit you will not have to worry about this issue. The limit for 2006 is $15,000 and next year it will be $15,000 plus an inflation adjustment.
