You Wouldn’t Turn Down Free Money Would You?

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neon-sign-239125_1280As crazy as the concept sounds, there are way too many folks that turn down free money. Where might you ask is this so called free money? Is it from the government? Yeah right, fat chance. Is it from your family? I doubt it. Is it from your employer? You are correct!

Wait a minute, my company pays me a salary/wage and they may pay part of my health insurance but how are they going to give me free money? They are doing it through the magic of a 401(k)* plan, which is so named for its location in the IRS tax code. This is a savings vehicle that has been around for decades and many companies offer them to their employees which has been a game-changer in the retirement arena particularly since all the funds in these plans grow tax deferred (not taxed until withdrawal). Since the pension is a near endangered species in the workforce, employers have increasingly turned to 401(k) plans as an alternative.

In my opinion, these plans have become a more attractive option to companies because it puts the onus of saving (and the risk) on the employee. The employer doesn’t have to worry about having money to pay for your pension when you retire and live to be 100 years old. There have unfortunately been many companies and municipalities in the news that have to reduce or eliminate pension benefits because they didn’t plan appropriately for their aging workforce. I can only imagine how devastating that is. Here’s something you were promised and now it is gone (or reduced) and you’re in the middle of your retirement with few other options for income.

Well, along comes the 401(k) in 1978 and years later they have become a go-to option for many companies. The funds you put into a 401(k) are invested how you choose (not how your company chooses) so that is attractive to most people that like to be able to control their funds and risk tolerance. And to get the free money I mentioned, you’ll have to find out the rules for you company’s specific plan to see how much they may match your funds that you invest.

A typical match might be 3% of your income, but I’ve also heard of a match going up to nearly 9% for some companies. So what that means is if you choose to have 3% of your salary deducted and placed into a 401(k) plan, your company will match that 3% you put in. If you make $50,000 and invest in your 401(k) at 3%, that’s $1,500 per year out of your salary and then your employer will match it with another $1,500. That is 100% return on your investment! Not to mention, the other benefits that could result from having a Roth 401(k) or from taking the reduced taxable income if you choose a traditional 401(k), but we’ll have more on that in later posts.

There is no place you can invest to get a guaranteed 100% return! Nowhere! That is why I say it’s like free money. So, if you are not investing the minimum in your 401(k) plan, you are turning down free money! Last time I checked, turning down free money was a bad idea. So, if you haven’t yet investigated your company’s 401(k) plan, contact your HR benefits folks and tell them you want some free money!

Before everyone drops what you’re doing and invests in your company’s 401(k) be sure of two things. Number one, do you have an emergency fund set up? And number two have you paid off your consumer, and auto debts? If you haven’t done these two things, just put the 401(k) on pause and get to it in a few months after you get your emergency fund set up or in a year or so after you pay off all your consumer debt. No company match will make up for the amount of money your are wasting on credit card interest, so handle that first, and then go get your free money!

*403(b) and 457(b) are also similar to the 401(k) but for employees of nonprofits or government entities and will be tax-deferred but may or may not have matching components included in their programs.

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