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Many Atrium doctors (and other high earners) make the mistake of contributing too much money to their 401ks. How can saving for retirement be a mistake?
If Jane makes $450,000/year and contributes 10% to her 401k, she'll run into a problem pretty quick. She’s going to contribute $23,000 halfway through the year. $23,000 is the 2024 401k employee contribution limit. Jane can't contribute anymore to her 401k without penalties and headaches. The problem here is that Jane didn't receive nearly as much company match as she could have. Her 401k received $22,700 of company match over 2024. If Jane spread her 401k contributions over the whole year, she could’ve received $31,500 from Atrium! She missed out on over $8,000 of tax-deferred retirement savings!
And that doesn’t include Jane’s own contributions.
That calculation included all three parts of Atrium’s 401k contributions, the Match (up to 4%), the Performance-Based (1-2%), and the Basic (2%). For that calculation, I assumed Jane was at the company for less than 10 years and therefore got a 1% Performance bonus.
Contributing $884 to your Atrium 401k biweekly will get you the maximum possible amount of company match and max out your annual 401k contribution limit. The goal is to stretch out your 401k contributions throughout the whole year so that you don’t fill your $23,000 limit early.
To change your contribution percentage, you can go to your Retirement elections. Empower, the 401k company that manages Atrium’s 401k, doesn’t allow you to pick a dollar amount for your 401k contributions for each paycheck. You must put a percentage.
You can calculate the percentage to put in each paycheck easily. Divide $884 by your paycheck amount (or annual salary/26). That’s the percentage to enter into your 401k election.
If I’m a young physician making $120,000, here’s how I would calculate that percentage. $120,000/26 paychecks equals $4,615, that’s my gross paycheck amount. $884 divided by $4,615 equals 19.15%. You must put a whole number as a percentage. I would round up from 19.15% to 20%. 401k record-keepers normally have rules in place to prevent someone from contributing over the limit. So I would put 20% as my deferral percentage in my Retirement Elections.
If you’re reading this article in the middle of the year, here’s how you can still optimize your 401k contributions. Look on your most recent paystub to find how much you’ve put in your 401k this calendar so far. It’s likely labeled “401k YTD”. Ignore the line that says “401k Match” or something similar. For this calculation, we only care what you’ve put in, not your employer. Let’s say that your 401k YTD says $16,400. I would subtract $23,000 (the annual limit) by $16,400 to get $6600. I would then divide $6600 by how many paychecks are left in the year. (You can google how many weeks are left in the year and then divide that by 2). $6600 divided by 12 paychecks equals $550. I would then use that $550 to calculate the percentage that I enter into my 401k elections on Empower.
This is just an example, not a recommendation. You should only save money for retirement if you can confidently pay your bills every month and you already have a 3-6 month emergency fund.
Here’s where it gets interesting for high earners. If you make more than $383,333/year, the match works out exactly the same whether you contribute 6% of every paycheck or $884 from each paycheck. If you contribute 6% each paycheck, then you’ll run into the $23,000 limit earlier, but you’ll still get the maximum possible match.
Since the stock market generally goes up over time, investing a year's worth of contributions earlier in the year rather than stretched throughout the year will give your money more time to compound with the stock market. Imagine you could either invest $1,200 in January or you could invest $100/month. In the vast majority of the stock market’s history, the $1,200 in January option would be a better choice. That’s a more extreme version of the concept I’m saying. Since we can’t predict what the stock market will do, the best we can do is put our money in the stock market earlier rather than later.
Therefore, the 6% contribution method will have more time in the stock market to earn money than the “Optimal Amount” would earn.
Atrium’s employer 401k contributions has 3 parts: the Match (up to 4%), the Performance-Based (1-2%), and the Basic (2%). These stack and pay up to 7-8% of your salary into your 401k.
The Matching contribution pays 75% of the 1st 4% of pay that you contribute and 50% of the next 2% that you contribute. So you must contribute at least 6% to your 401K to get the maximum 4% match from Atrium. In this article when I discuss how hitting that $23,000 limit too early will cause you to miss out on company match, these are the match dollars I’ve been referring to.
The Performance-Based contribution is about how long you've worked at Atrium. If you've worked under 10 years then you get an extra 1% of pay to your 401K. 10 to 19 years gets 1.5%. And 20 plus years of service gets you 2% of extra match. This doesn’t stack. You get 1-2% of this.
The Basic contribution is the automatic 2% that Atrium pays to every qualifying team member’s 401k.
Let’s use Jane as an example again. She makes $450k/year and defers 6% of her income because she read this article. She would contribute $23,000 of her own money to her 401k. For the Matching contribution, Atrium Health would contribute $18,000 ($450k * 4%). For the Performance-based contribution, Atrium would contribute $4500 ($450k * 1%) because she’s been working at Atrium for less than 10 years. For the Basic Contribution, Atrium would contribute $9000 ($450k * 2%).
To calculate the optimal 401k contribution amount, you simply need to divide the annual 401k employee contribution limit ($23,000) by the number of paychecks you get in a year (26 in 2024 if you’re biweekly). This gets you $884. This will help you stretch out your 401k contributions throughout the whole year. Contributing to your 401k for every paycheck of the year helps you get the maximum amount of match.
The IRS allows people 50 or older to contribute an extra $7500 to your 401K each year. It’s called the Catch-up contribution. Atrium’s company match doesn’t apply to the extra $7500. You only get company match on the first $23,000 you contribute to your 401k.
Atrium employees have an extra step to make Catch-up contributions. If you’re 50 or older (and can afford to do so), “you can go online at www.atriumhealth.org/retirement or by calling Empower Retirement at 1-866-247-0970. You must elect a dollar amount to be deducted per pay period as a catch-up contribution throughout the calendar year.” Fun fact: $7500 divided by 26 paychecks equals about $288. So, you might want to use that number when you change your payment elections.
If you’re reading this already part way through the year and all the other criteria apply to you, here’s how you calculate how much to put away for Catch-up contributions. $7500 divided by the number of paychecks left in the year.
If you’re a 50+ physician (or other medical practitioner), you’re likely in your peak-earning years. Your peak earning years are usually the best years to save as much as you can in pre-tax retirement accounts, like traditional 401k’s. During your peak years, you’re in a high tax bracket. After you retire and you start withdrawing from your 401k, you have to pay income tax on the money that comes out. You’re most likely going to have a lower income (and lower tax rate) in retirement than in your peak earning years. That's why many advisors advocate for saving in pre-tax accounts (like 401k's) during your peak earning years.
Atrium Health automatically enrolls their new employees into the 401k plan with a 3% contribution rate. This amount automatically goes up each year by 1% until it hits 6%. 6% is the magic number where you receive the maximum amount of Atrium company match, 4%. This means that for the first two years of working at Atrium, you're likely not receiving the maximum amount of free company match.
Again, I'd like to reiterate that this is not financial advice. These are estimations that work in theory but everyone's situation is different. It's extremely important that you only save for retirement if you can easily cover your monthly bills and you already have 3-6 months of expenses saved up.
A 401(k) is a retirement savings plan sponsored by an employer, allowing employees to save and invest a portion of their paycheck before taxes are taken out. There are two main types of 401(k) plans: traditional and Roth. Atrium offers both, traditional is the default. In a traditional 401(k), contributions are made with pre-tax dollars, reducing taxable income for the year, but withdrawals during retirement are taxed as ordinary income. Conversely, Roth 401(k) contributions are made with after-tax dollars, meaning there's no immediate tax benefit, but qualified withdrawals in retirement are tax-free.
Employers often enhance the benefits of a 401(k) by offering matching contributions, which can significantly boost an employee's retirement savings. For Atrium, they match 75% of employee contributions up to 6% of their salary. This means if an employee contributes 6% of their salary, the employer adds an additional 4%, effectively increasing the total contribution to 10%. This numbers vary depending on the company. This matching mechanism not only encourages employees to save more but also provides a substantial incentive to participate in the plan.
The Self-Directed Brokerage Account allows you or your financial advisor to manage your 401k at work. Atrium offers this. An SDBA allows you to choose from far more investment options than just their target date funds. You can choose from thousands of publicly traded mutual funds, exchange traded funds (ETFs) and individual securities, in addition to the Plan’s core investment options.
You can even have a financial advisor manage the account for you. Your advisor can select the right investment portfolio that fits with your retirement and life goals.
We’re happy to provide more information about how Fortress Physicians can tailor your 401k to a more efficient and customized portfolio. You can give us a call at (919) 322-2761 and ask for more info about Self Directed Brokerage Accounts at Atrium.
Disclaimer: Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and may not represent specific trades or transactions that we have conducted.
All investing and trading in the securities market involves risk. Any decisions to place trades in the financial markets, including trading in stock or options or other financial instruments, is a personal decision that should only be made after thorough research, including a personal risk and financial assessment, and the engagement of professional assistance to the extent you believe necessary.
