Ten Minute Tip: Join and Contribute to Your Company’s 401K

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Are you employed? Does your employer offer a 401K (or 403B, or any number of similarly acronym’d up retirement plans)? Does your employer offer an employer match/contribution on dollars you contribute? If the answer is yes to all three, you better be contributing to your 401K. If your employer doesn’t offer a match, you should still be contributing to your own retirement though it’s not as pressing. It should take you less than ten minutes to sign up for your 401K unless your company is stuck in the stone ages. Give your HR a call or check out your company Intranet for a 401K enrollment form, fax/inter-office mail that baby over to HR/Benefits, and you should be all set. As for the what funds you should divvy up your hard earned money into, just wing it until the account is setup. You can figure all that stuff out later, time is of the essence!

For many recent hires, this is a non-issue because the Pension Protection Act of 2006 made employers auto-enroll their employees. So, for some, this tip took less than ten minutes! The next step is making sure you’re contributing enough. The law says that you’re auto-enrolled at 3% and then every year after that you’ll be bumped up 1% until you get to around 6% to 10%. Now, employers are not required to do this (they get out of some discrimination testing if they do), so there’s a chance your employer hasn’t done any of this (double check!). Also, this is what the employer must do, you can adjust it up or down or sideways as much as you want.

Let’s say your employer offers to match your contributions 50 cents to the dollar up to 3% of your salary. That means if you contribute 6% of your salary, they kick in 3%. Well, if you’re auto-enrolled at 3%, that means you’re leaving 1.5% of your salary on the table because you didn’t do anything. 1.5% doesn’t seem like much but:

  1. It’s free.
  2. In 40 years, with interest and years of 1.5% of your salary, that’s going to be a lot of money.
  3. It’s free.

So, make sure you’re enrolled and make sure you’re contributing enough. If you saw a twenty on the sidewalk, you wouldn’t just walk by it would you?

{ 3 comments, please add your thoughts now! }

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3 Responses to “Ten Minute Tip: Join and Contribute to Your Company’s 401K”

  1. thomas says:

    If you don’t contribute to your company’s 401k to get free money, you are an idiot. There really is no other way to put it.

  2. rstlne says:

    You need to contribute enough to your 401K to get the most employer matching contribution possible. To do otherwise would be to leave money on the table. Beyond that, I’m not sure the 401K is such a big deal because you’ll have to pay taxes on withdrawals at the end anyway. If, however, you’re on the verge of getting disqualified for certain tax credits because you’re hitting income limits on those tax credits, bumping up your 401K can help you stay within range.

    Aside from those considerations, I would suggest the following scheme:

    1. Contribute to your 401K up to maximum employer match.
    2. Contribute to your Roth IRA up to your IRA limit.
    3. Contribute to your 401K up to the annual maximum.
    4. Save the rest in taxable accounts. Use index funds or ETFs or hold stocks for the long term for tax efficiency.

  3. LDE says:

    My employer does not have a 401k plan at all and I am a w-2 employee. Is there anything I can do to set myself up for a retirement plan? Can I set myself up with a SEP and request my employer to take money out of my paycheck (pre-tax) and fund my SEP so that I’m doing something for myself?


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