Earning a guaranteed 50% or 100% rate of return on your money is almost always classified in the ‘too good to be true’ category in the saving & investing world – except for one. The employer matching feature in your 401(k) account. It is free money you can snag if you do your part. Your part is contributing toward your retirement within the plan. It really is a win-win for the employee since you are taking a big step toward owning your retirement and you are receiving a kicker for doing so!
Here’s how it works – your 401(k) plan will have a provision by which your employer will ‘match’ your contributions up to a certain percentage amount. Putting numbers to this, the typical matching amount is ‘50% up to 6%’ of what the employee contributes, though the numbers can vary by company. For example, a 6% contribution on a $50,000 salary is $3,000 and the 50% company match is $1,500 for a total contribution of $4,500. You are on a great path toward retirement if you are sure to contribute up to your employer’s full match.
Think of the match as part of your salary – it is that important since nowhere else can you earn an instant 50% or 100% rate of return. One caveat though is you often have to be ‘vested’ in the 401(k) plan in order to keep the money your employer contributed. A ‘vesting’ period is just the number of years you have worked for the firm. Vesting scheduled vary by firm too but almost all are 5 years or less. Some plans even allow for immediate vesting. You have to forfeit all or part of the accumulated company matches if you leave the firm before the vesting period ends.
Contributing to your employer’s retirement plan up to the match is just about the first priority for building savings. The incredible instant rate of return is even more important than paying down high interest rate debt! Think of it this way – if you get that 50% match, that is a 50% return versus perhaps 20% interest you may be paying on a high-interest credit card. Now certainly once you have captured the match, be sure to work as hard as possible to pay down bad debt like outstanding credit card balances.
Did you know there is another potential employer match you can snag? Check out your company’s health insurance program, and if there is a Health Savings Account (HSA). We won’t get into all the details of the HSA here, but this newer type of account sometimes has a feature just like a 401(k). Your company will sometimes contribute to the HSA if you do the same. This is another very high-priority savings opportunity you must take advantage of if available.
A few rules to keep in mind. The current annual 401(k) maximum contribution is $19,500 for those aged under 50. The max is $24,500 for those 50 years and older. This max only applies to the employee’s contribution, so the savings potential can be huge when you combine your contribution with the employer’s. Also, you must not withdraw from your 401(k) before age 59.5 otherwise you will face a 10% early withdrawal penalty per the IRS. Qualifying withdrawals made at age 59.5 are considered taxable income. Most 401(k) plans now offer the “Roth” option where your contributions are made after-tax and qualifying withdrawals are tax-free. Your company match is always made with “pre-tax” money though, so that will be taxable income upon withdrawal.
Here’s the point
- The 401(k) match is free money your employer provides IF you contribute to your retirement plan at work. So do your part.
- It is often an instant 50% or even 100% return on your money; think of it as part of your salary.
- Keep the vesting schedule in mind and the withdrawal rules of a 401(k) plan.
- Your employer’s Health Savings Account might have a matching feature like the 401(k).
Action items
- Contribute up to the match in your 401(k) plan now; it is the best safe rate of return you can earn (just know your vesting schedule!).
- Talk with us at TFC. We are here to help you invest the contributions made to your 401(k) – after all, you want it working for you, not just sitting around earning a low interest rate.
- Let us help you strategize a customized saving & investing priority list to get you on the best path toward financial success.