Getting the most from your 401k employer match was written by Jenny Holt on March 1, 2017. Read this article to know more about 401k and how the employer match works.
Most people would agree that there’s nothing better than free money. Many people don’t take advantage of free money when it’s available to them. If you have a 401k plan at work with an employer match that you’re not taking full advantage of, you’re leaving free money on the table.
How the Employer Match Works
Many employers offer to match some of the funds that employees save in their 401k plan. This is a benefit to employees, and it encourages them to save money for retirement, which would be a recommended sensible financial choice for the future, alongside the security of a life insurance policy.
There are three factors that make up the concept of the employer match: the amount the employee contributes, the amount the employer contributes, and the match percentage.
Here’s an example. Jane makes $50,000 a year as an accounting clerk. Her employer offers a 401k plan that matches 100% of the first 2% that she contributes. She contributes $5,000 per year, or 10% of her salary, to her 401k account. (This is called a ‘deferral’ since she’s deferring $5,000 of her salary to be used later when she retires.) Her employer contributes an additional $1,000 to her account, which is 2% of her salary. A total of $6,000 goes into her 401k, even though she only deferred $5,000.
The amount and percentage of the employer match can vary. Joe’s employer matches 50% of the first 5% that he contributes. Like Jane, he makes $50,000 a year and contributes $5,000 to his 401k. His employer matches half (50%) of the first 5% ($2,500) for a contribution of $1,250. The total contribution to Joe’s 401k is $6,250.
How Much You Can Save
The IRS limits the amount that you can save in a 401k account. The 2017 limit for the combined contribution, including your deferral and your employer’s match, cannot exceed $54,000 or 100% of your compensation.
Most people are not able to save the maximum amount, but you should at least save the amount you need to get the employer match. So, if your employer matches up to 2% of your income, make sure you’re saving at least 2%.
Here’s an easy way to make sure you’re getting the most from the employer match. When you start a new job, enroll in the 401k plan as soon as you can. Contribute at least enough to get the employer match. Every time you get a raise, increase your contribution by half of the amount of your raise. If you get a 3% raise, increase your contribution by 1.5% of your salary. This will steadily increase the amount you contribute and put you in good shape when you get to retirement.
This article entitled “Free Money! Getting the Most from Your 401k Employer Match” was written by Jenny Holt forwarded for Retirement Planning IQ; a InvestmentTotal.com partner site. Leave a comment below!