A common mistake that many investment advisors see involves employees not taking full advantage of the employer match in their employer’s retirement plan. Many 401(k) plans offer some type of employer contribution that ‘matches’ an employee’s own contribution to their retirement account. The amount can vary to some degree depending on the wishes of the employer, but the most common are a 100% match of an employee contribution of up to three or four percent, or a 50% match of an employee contribution of up to six percent.
For a simple example, if you make $50,000 per year and your employer has a 100% match on contributions up to three percent, your employer would add $1,500 of free money to your retirement account if you put in $1,500 of your own money!
You can see the potential benefit of taking advantage of this feature in your retirement plan: you can literally double your money before you even invest in the markets! Since the employer’s money goes into your retirement account, you typically do not pay tax on these funds until you withdraw them from your account at retirement. This is the same tax treatment as your own funds that are contributed into your traditional 401(k) account. Any gains on the investments in the account grow tax-deferred each year and you do not pay taxes until the funds are withdrawn.
As times are difficult for a lot of individuals and families during our current economic situation, it is important not to overlook the significance of your employer’s matching contributions and the benefit they can have for your retirement savings. Obviously, the more you can contribute to your 401(k) account, the better- limits are up to $17,000 in 2012 or $22,500 if age 50 or over- but since that isn’t possible for a lot of employees, you should at least take full advantage of the free money that your employer is willing to give you just for saving for your retirement.
As always, please feel free to contact your Wealth Manager or Financial Advisor with any questions.