This is the worlds leading source of financial content on the web, ranging from market news to retirement strategies, investing education to insights from advisors.
Forex Forever!

If Your Company Is Matching 401(k)s, Max It Out!

Author: Christopher Smith

You've probably heard this from your folks when you were growing up: If you would just do what I tell you to do, I wouldn't have to tell you the same thing over and over.

In the world of retirement planning, that's what financial advisors are telling their clients when it comes to their 401(k) plans (or 403(b), if they work for a non-profit). If your employer wants to give you free money, you should definitely take it. So why do so many people say no?

What's the Catch?

Maybe it seems too good to be true. Does it seem like something that must have a catch – like those Earn $10,000 per month working from home! ads that you see? There's no trick. Your employer is basically giving you money, gratis, by contributing to your 401(k). Just like health insurance, it's part of your employment benefits package.

Well, it is tricky, in a way: Matching some percentage of the funds you put into your 401(k) probably costs your employer a lot less than the old-school pension plans, to which you didn't have to contribute at all. Your company is no longer funding your whole retirement. They're offering to fund part of it; it's a relative deal for them.

It's Probably Not That Much, Anyway

Oh, but it is! Let's say you make $50,000 per year. Your employer matches 50 cents for every dollar you contribute to your plan, up to 6% of your salary. If you made the maximum annual contribution that was eligible for an employee match ($3,000), your employer would give you an extra $1,500 per year. Over time that $1,500, added to your continued contributions and employer matches, becomes a substantial boost to your 401(k)'s growth.

That's not taking into account salary raises, rises in interest rates, stock market gains and other variables that could drive it even higher. For ideas on making that happen, See The Best Strategies to Maximize Your 401(k).

I'm on a Budget

Possibly the largest objection from people regarding their 401(k)s is this: I would love to contribute more, but I don't have enough money. Nearly everybody, regardless of income level, has areas where they could cut expenses. Could you cut back on the features of your cell phone or cable plan? Order fewer espressos from the corner coffee house? Small changes can make a big difference. The earning power of that $4 that you spent at Starbucks is huge over time. What if we told you that investing that $4 would result in more than $200 over 25 years, assuming a 5% annual interest rate?

What About the Tax Bite?

Great news: Your employee match is considered pretax income. That means you won't pay a dime of taxes on it. It's true that you will pay taxes on the funds, and any investment gains that have accrued from them, but that doesn't happen until you start taking distributions from the account or cash it out completely. And not even then, if you roll it over into a traditional IRA. (For more tips, see How to Minimize Taxes on 401(k) Withdrawals.)

The Bottom Line

Many of the money decisions you have to make in your lifetime aren't cut and dried. You have to weigh a number of options and most people will tell you to talk to a financial professional. This isn't one of them. It's a no-brainer. Fund your 401(k) to the degree that will get you the entire company match. If your household expenses are too much to contribute the maximum, look for ways to reduce them.

It really is that important, to fund your plan as much as you can. In fact, in 2015, you can put up to $18,000 into your 401(k), plus an additional $6,000 if you're age 50 or over. If you're flush enough to do this (even if it's more than 6% of what you earn), that's even better Once you start seeing that retirement account grow, you'll soon be asking: Why are 401(k) contributions limited?

last five articles

#1823 3 Stores to Avoid This Coming Black Friday

Author: Michael Williams

Black Friday has become as much of an American tradition as the day that precedes it, Thanksgiving. While some may call this a sad statement on the country's values and priorities, the fact of the matter is Black Friday, and the madness it engenders, is not going away anytime soon. Even with the ... see more

#1314 Traveling to Houston on a Budget

Author: Michael Davis

Houston flies under the radar as a popular vacation destination, but the city has much to offer for a fun getaway. The nightlife is top-notch, outdoor recreation is bountiful, the weather is warm for most of the year, and the beach is only an hour away in Galveston. Add cultural attractions, whic... see more

#633 Six Ways Your Tax Preparer Knows You're Lying

Author: Andrew Taylor

Jesus of Nazareth told His followers during the height of the Roman Empire to render unto Caesar the taxes that were levied upon them. Two thousand years later, many people still struggle with this obligation. Rising taxes, a slow economy and the costs of Obamacare have tempted some taxpayers to ... see more

#1002 I Maxed Out My 401(k)! Now What?

Author: Christopher Williams

If you've already reached your 401(k) contributions limit for the year (or soon will), that's a high-quality problem. But it's still a problem. You can't afford to fall behind in the funding-retirement game (who knows what the cost of living will be when you stop working?). And losing the contrib... see more

#1086 More Banks Offer Free FICO Scores

Author: Michael Davis

A three-digit number holds one of the most important pieces of financial data there is about you: your credit score. Lenders use the score to assess how much of a risk you are. It also helps determine whether or not you'll be approved for credit and how much you'll pay in interest on credit cards... see more