Retirement savers, are you making the most of your company’s 401(k) match? Even though a quarter of the year has gone by, you can take steps to make the most of your company’s 401(k) match. Each year, Americans leave billions of dollars in 401(k) company matches on the table. Here’s how to avoid becoming one of the estimated one-in-four employees who miss out on free money.
Understand the value of an employer match
A 401(k) or similar employer-sponsored retirement plan can be a powerful resource for building a secure retirement — and an employer match can add a substantial amount to an employee’s nest egg. Let’s assume you are 30 years old, make $40,000 per year, and contribute 3% of your salary ($1,200) to your 401(k). And, only for the sake of this example, let’s also assume you continue to make the same salary and same contribution each year until you are 65. After 35 years, you will have contributed $42,000 to your 401(k).
Now let’s assume you get a match from your employer. One of the most common matches is a dollar-for-dollar match on up to 3% of the employee’s salary. Taking full advantage of the match literally doubles your savings, even assuming no increase in the value of your investments: Instead of having set aside $42,000 by the time you retire, you will have set aside $84,000.
That’s $42,000 in free money. Looked at another way, it’s a no-cost way for you to increase your contributions by 100%.
Recognize the tax advantages
In addition to offering the potential for free money through a match, employer-sponsored retirement plans can give you significant tax advantages. With a traditional 401(k), for instance, your contributions are made with pre-tax dollars — meaning the money goes into your retirement account before it gets taxed. In addition, your contributions, any match your employer provides, and any earnings in the account (including interest, dividends, and capital gains) are all tax-deferred. That means you don’t owe any income tax until you withdraw from your account, typically after you retire.
With pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you will owe less in income taxes for the year. But your take-home pay will go down by less than a dollar. Here’s how that works. Building on the example above, the $1,200 you contribute to…