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Your 401(k) Match: Don’t Miss Out on Free Money

Written by Nickel - 13 Comments

Does your employer offer to match a portion of your retirement contributions? If so, are you taking advantage of it? I hope so. If you’re not, you’re leaving free money on the table.

There’s been a lot of talk about whether or not you should suspend your retirement contributions when you’re working to get out of debt, but… I would think and long and hard before I decided to forego a match.

This isn’t to say that you shouldn’t scale back if you’re in debt reduction mode, but many of the best 401(k) plans match 50-100% of your contribution up to a certain point. If you don’t want to keep going full bore with your retirement savings, at least consider socking away enough to secure the full match.

Published on December 18th, 2009 - 13 Comments
Filed under: Retirement, Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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13 Responses to “Your 401(k) Match: Don’t Miss Out on Free Money”

  1. 1
    Anthony Says:

    Here’s how I am/will be allocating my monies:

    1. Contribute enough to 401(k) to receive full employer match. FREE MONEY!
    2. Start a small emergency fund.
    3. Pay down double-digit debt.
    4. Finish emergency fund.
    5. Max out Roth IRA.
    6. Max out 401(k).
    7. Max out HSA (health savings account). My company offers free money for this!
    8. Pay off student loans. (Actually, my commitment to myself for 2010 is to aggressively pay down student loans, while building my emergency fund (Step #4).)
    9. Pay off mortgage.

  2. 2
    RJ Weiss Says:

    Agreed – Not taking the 401K match is like leaving money on the table.

    As for contributing to your 401K before paying off debt, it really depends on the interest rate of the debt. I would be careful contributing to a 401K before you have all of your high interest debt paid off.

  3. 3
    John Says:

    My employer has a program where it increases your contribution by 1% per year unless you tell them not to do so. Mine was up to 5% + company contribution of 4% total. They do 3% automatically and another 1% match to your 2%. I reduced my contribution to 2%, so i am still receiving the max 4% from the company while I reduce my debts. When I have the debts cut to where I want them I will start investing in a Roth IRA. Between debt payoff and savings right now I am increasing my overall net worth by over $1000/month.

  4. 4
    J Money Says:

    This is probably the one thing that drives me CRAZY in the of world – when people ask for “secret tips” and you tell them stuff like rockin the 401k and they scoff! I personally believe it’s the EASIEST (and
    fastest) way to double your money hands down. Legally anyways ;)

  5. 5
    John DeFlumeri Jr Says:

    It is crazy not to take advantage of matching contributions, many employers don’t do it amymore.

    John DeFlumeri Jr

  6. 6
    Aaron Margeson Says:

    @Anthony,

    Depending upon how long it takes to finish the emergency fund, I would recommend to put money in a Roth IRA first in low risk account to ensure you get that amount in for the year. Since contributions can be withdrawn anytime, you can still tap it for an emergency but still get your $5000 in for the year. Once you build a proper rainy day fund, you can move the money in the Roth IRA out into whatever investment vehicles you’d like that may have more risk.

  7. 7
    Patrick Says:

    I also think it would be foolish to not be paying attention to what is going on in Washington. I am placing my bets that taxes will go up in the next three years, HSA’s may become obsolete if Congress passes a health care bill and companies will be under pressure to stop matching 401k matches by stockholders demanding dividends.

  8. 8
    Doctor Stock Says:

    Great post… the same principles apply in Canada too!

  9. 9
    TheDebtHawk.com Says:

    I really think that people should take advantage of the 401(k) if their employers offer one. A little trick I like to use is to put every raise I get into my 401(k). This is slow, but typically in a few years everyone will be at the match.

  10. 10
    cemccon Says:

    I would also like to see employers base their 401(k) ‘match’ on the amount of one’s contribution, and NOT ON THE AMOUNT OF ONE’S SALARY! For instance, at my Fortune 100 employer, our 401(k) match is based on OUR SALARY, and not our contribution. So, someone who makes $15,000 and contributes the maximum gets a smaller match than someone who makes $30,000 and contributes the maximum, who both get a smaller match than someone who makes $60,000 and contributes the maximum, etc. I raised that issue with my employer, but they have no intention of changing their policy. Since the 401(k) was envisioned as a way to encourage us to save for retirement, shouldn’t all of us get the same amount of matching dollars, given the same contribution amount?

  11. 11
    J. Money Says:

    @cemccon – yeah, that’s jacked up! I totally agree it should be based on what you put in – not salaries. $hit, if you make $30k and you can put in just the same as someone making $60k you should get MORE for being a financial rock star! haha…

    @TheDebtHawk.com – I love that idea!! i might have to post about that ;)

  12. 12
    cemccon Says:

    In regards to my earlier post … some examples:

    First, my employer contributes dollar for dollar on the first 2% of your base pay, and then 50 cents on the dollar for the next 4% of your pay. So, to receive a full match, you need to contribute 6% of your pay. Also, everyone gets a 1% non-elective contribution. While companies sell the NEC as them being awesome employers, etc., the real reason they do it has to do with compilcated taxation / penalty issues that arise when highly compensated employees contribute more than everyone else to the plan.

    Anyway, on to the examples:
    assuming the maximum contribution is $15,000; which I’m using to keep the math a little more straightforward.

    1) an employee who makes $15,000 / year and contributes his entire $15,000 salary to the 401(k) plan (not very realastic, but part of the example, none the less) would have a total company match of $600.

    2) an employee who makes $30,000 / year and contributes 50% of his salary to the 401(k) plan would have a total company match of $1,200.

    3) an employee who makes $60,000 / year and contributes 25% of his salary to the 401(k) plan would have a total company match of $2,400.

    I think it would be much more equitable if each of these employees had their match based solely an the amount of their contribution, and not on their salary!! I would suggest something like making the match 15% of the total contribution, irregardless of salary. So, a $15,000 contribution would get you a $2,250 match, no matter what your salary is.

    I know that is not very realistic, but I think doing so would encourage more lower-income folks to save more in their 401(k) plans, as they would be leaving more money on the table by not contribution more to their 401(k).

  13. 13
    Bodark Says:

    There has been a few comments at employers in the above post. Just for clarification:

    401(k) is an IRC (Internal Revenue Code). That all qualified defined contribution plans must adhere to. Prior to “hammering your employer’s motivation or willingness to change their ways”.

    Please review ERISA of 1974, and Non-discrimination testing (the context of employee benefits, not social discrimination). You might be amazed at how good your plan is and how limited your employer’s choices are.

    And for 2010, your individual 401(k), 403(b), 457 deferral limit is $16,500 or $687.50 per pay check (if you are paid twice a month). If you are meeting that threshold, then looking into post tax savings is your next alternative.

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