If You’re Making This 401k Mistake Your Retirement Dreams Could All Go Up In Smoke
Here’s a hypothetical situation for you to consider: What would you do if someone walked up to you and offered you an envelope full of cold, hard cash with no strings attached? Would you take the money and run like a mad man or woman? Or would you say “no thanks” and merrily go on your way without giving it a second thought?
You might think it’s a silly question or that I’m off my rocker. After all, who would be crazy enough to turn down free money?
But the truth is that there are millions of people who are doing exactly that, and you could be one of them and not even know it!
According to a report released by AON Hewitt, 29 percent of 401k participants are not contributing enough to receive the full employer match. In other words, their employer is offering them free money and they’re turning it down.
Employer Match = Guaranteed Return
Employer matches can vary from one company to another. Some employers are extremely generous while others don’t offer any match at all. But just for an example, let’s say you work for a company that offers a 100% match on all of your 401k contributions up to 5% of your salary. Let’s also assume you earn $50,000 in salary.
If you contribute 5% of your salary you’ll be putting a tidy $2500 a year into your 401k account. But since your employer is matching those contributions your account will actually be growing $5000 a year! That’s an instant return of 100%!
While 401k plans aren’t perfect (they are often laden with hidden fees and it can be tough to get your money out if you need it) they do offer substantial tax benefits and an employer match is just too good to pass up. If at all possible, you should increase your contribution rate at least enough to receive the full employer match.
If you’re just scraping by and don’t think you can find the money to contribute, keep in mind that you won’t have to do without the full amount of your contribution. I know that sounds weird but it is true. Contributions to a 401(k) plan are not taxable until you withdraw them, so they actually reduce your taxable income. So if you are in the 25 percent tax bracket and you contribute $100 into your retirement account, your take home pay will only be reduced by $75 (because you won’t be taxed on your $100 contribution).
In other words, you contribute $100 and your company matches with an additional $100. In the end you have $200 and it only cost you $75. That is a deal that can not be beat!