Free Money for Your 401K
Taking advantage of employer matches and pre-tax savings| By: Randall E. White, CFP®, RICP®, CRPC®, CMFC®
Chances are if you are reading this article you are at least thinking about your retirement, or more specifically, your retirement savings. Or lack thereof. What some people don’t realize or take advantage of, especially if they are working in a mid-size to large company is that they are often offered helpful employer benefits. These benefits may be classified in your employee handbook in various ways, such as:
- defined benefit plan
- company pension
- lump-sum payments
- lifetime annuity
- vesting schedule
When any of those words crop up, the next step is delving in to figure out what your employer offers that you could be benefitting from. You may be surprised that 1 in 5 Americans do not take full advantage of their employer match 401(k)[i], resulting in $1.4 billion in unclaimed employer match money annually.[ii]
Do Your Homework
Your first step is going over your employee benefits and understanding your options. Consider these key points:
- Summary Plan Description: the summary plan description should outline how long you have to be at the job to start collecting benefits. It should also go into what happens if you leave the job and how long until the money is fully yours (fully vested).
- Your Vesting Schedule: If there is a vesting schedule, you may not only need to work at your job a certain amount of time to be eligible for employer match, you may also have to work there a certain length of time to take the money with you.
- Lump-Sum or Annuity: You may also have options to take a lump sum instead of a lifetime annuity.
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Within the summary, all of the details about your 401(k) plan will be outlined as well, including the types of investing options and their risks, how often you can change your plan, and your options for distribution, such as in the case of hardship or divorce. The plan will also detail the employer-match options, which is the “free money” mentioned in the title of this article.
There are two main types:
- Partial matching which as it sounds, means the employer will contribute a partially matching portion of the amount you contribute (for example if you contribute 6% they contribute 3%, you do 4% they do 2%).
- Dollar for dollar matching is where an employer matches 100% of your contribution within set limits, often capping it at between 6 and 10%.
The Financial Benefit of Employer Match
If you contribute the maximum to your 401(k), which is usually 6% of your yearly income, the standard employer match could be at least an additional 3%, basically 50% of your contribution, for free.[iii] On top of that, by contributing to your savings pre-tax you will also reduce your taxable income, pay less current taxes, and essentially be contributing money tax-deferred to your retirement account and getting an employer match of up to 50% dropped in there as well.
There is no other risk-free, tax-deferred, 50% return on investment out there, so not taking advantage of this employee perk really is just a lost opportunity to easily increase your retirement savings. Even when a 401(k) is invested in very conservative mutual funds, it would still take years to be matched in any other investment.
Another benefit of the employer match is that it allows you to exceed the annual 401(k) contribution limit, as employer contributions are not counted toward your maximum limit.
Getting Started on Contributing to Your 401(k)
Never assume you don’t make enough money to take advantage of a plan.
Even if you start small, you will be building toward something, and with your employer match, saving more than you would if you were just socking it away in a slow-growth savings account. You may be surprised how little your net take-home goes down when putting 6% toward savings. Understand that even if something happened to your employer, your 401(k) would be protected from creditors and you could roll your investments into your next 401(k) or into an IRA.
Currently, only 1 in 3 Americans use a 401(k) plan, so learn the ins and outs so you can make informed decisions that will help you reach your goals.[iv]
Make a Long-Term Investing Plan
For a lot of employees, the reason for not taking advantage of employer matching or other benefits comes from a lack of knowledge. 1 in 3 employees are unsure what to do with their 401(k) after they retire.[v] So, let’s start there. You have a few options for your retirement savings in a 401(k) when you retire:
- Leave your money in the plan
- Take payments from the plan in installments
- Roll money over to an IRA
- Take the money as a lump sum
Each of these choices comes with pros and cons, so talking to a professional and making an educated decision is really important. The goal is to take advantage of any and all employer benefits to help build your retirement savings and set you up for a secure future.
Good luck and happy saving!
Securities offered through Triad Advisors, LLC, member FINRA/SPIC. Advisory services offered through TriCapital Wealth Management, Inc. TriCapital Wealth Management, Inc. is not affiliated with Triad Advisors, LLC.