Money: Max out your 401k Company Match or How to get every matched penny for retirement
Do you have a company provided 401k or 403b?
Does your company offer you free money?
What free money?
Most companies that provide a 401k or 403b also provide some form of employer match.
Roth 401k Note:
Roth 401k is very new for most companies (made permanent in 2006). I will be talking about this in later posts. The reason I bring it up here: Most company matches do NOT apply to Roth 401k … yet. Check with your employer!
Employer Match Example:
For the first 6% of your pretax dollars you contribute to a 401k or 403b, your company will match 50%. Translation, if you save 6% your company will give you 3%. A total of 9%. Neat.
The article title had something to do with Max out company match and get every penny for retirement… aren’t those one in the same? Not really. Here’s why:
Company match is outside of the max personal contribution limits. In 2008 you are able to save a total of $15,500. However if your company does a match, that means you get to save $15,500 + 3% of your total salary. This is how you can legally save more than $15,500. Neat indeed, go Google to double check against other sources, I’ll wait.
Your company only gives you the match during your pay period where you are deferring money to your 401k or 403b. This means if you don’t spread out your contributions over every pay period in a year to take advantage of dollar cost averaging you also don’t get the company match.
Huh? You lost me
Example:
Person 1 has a bi weekly pay schedule (26 pay checks a year).Person 1 gets a year end bonus of 15,500 (I want that job) and deposits it all into their employer 401k to avoid the 42% tax on bonus (note your tax rate will vary from state to state, but it is way higher than normal salary). Person 2, paid bi monthly saves enough to max out early. So they can have more money for xmas shopping. Person 3, does a little math to put in the correct amount of money so every pay period is the same.
|
|
Person 1 |
Person 2 |
Person 3 |
| Pay Frequency |
Bi weekly (26) |
Bi Monthly (24) |
Bi Monthly (24) |
| Salary |
50,000 |
50,000 |
50,000 |
| Contributions |
15,500 lump sump |
775 per pay period. Will max out after 20 pay periods |
645 per pay period with an increase in last period to max out |
| |
$15,500 + ((50k * .03)/26) |
(775 * 20) + ((50k * .03)/24) * 20 |
645*24 + extra = max 15,500 + (50k * .03) |
| Total invested in 401k |
$15,557.69 |
$16,750 |
$17,000 |
Summary:
Person 1 – Maxes out personal contribution but leaves money from company on the table
Person 2 – Maxes out personal contribution but leaves $250 from the company on the table
Person 3 – Maxes out both personal and company contributions as well as has best dollar cost averaging for greatest return on compound interest investing.
Review:
Make sure you save at least the minimum amount your company matches.
Best Case: Save enough to get the entire company match as well as max out your 401k (if possible)