Retirement – 401k plan match

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Most companies these days offer employees a retirement plan, usually called a 401k.  As a part of these programs, companies will often offer a company match to help you save for retirement quicker.  Both the plan and the match are considered part of your benefits package.

You should always take advantage of the full company match – this is free money!

Matching programs differ from company to company.  Some companies will contribute a percentage of your salary to your 401k plan, even if you don’t contribute to the plan – this is pretty awesome, and also rare.  The company I work for will contribute 4.5% of my salary to my 401k plan as long as I contribute at least 5% of my salary to the plan.  That means, if 5% of my salary is $1,000, when I contribute $1,000 of my salary, my company will contribute $900 of their money to my 401k account.

You are always welcome to contribute more than that to your 401k plan, and I encourage you to do so.  You can never save too much for retirement!  However, you should always contribute at least the minimum required in order to qualify for the company match in your 401k plan.

For 2014, the IRS has decided that the maximum amount you are allowed to contribute to your 401k plan is $17,500.  This is quite a lot of money, and you may not be in a position to defer all that income each year.

Ideally, when you start your next job, you will “max out” your 401k contribution by contributing $17,500 all at once.  It may be tight at first, but as you move up in your career and receive cost of living increases, raises, and promotions, the maximum amount to contribute to your 401 plan will become a smaller and smaller percentage of your salary.

If maxing out is not possible in your situation, start with the percentage that is required in order to receive the company match.  Then each year, increase this percentage by 1%.  You won’t notice that much of a difference in your paycheck, especially if you increase the percentage at the same time as you receive your annual raise.

By increasing your 401k contribution by 1% each year, you will eventually get to the maximum contribution amount allowed each year.  If you are given an extra-large raise one year, don’t be shy to increase your contribution percentage by more than just 1%.  The more, the better!

Since it did not occur to me when I started this job to max out my 401k contribution, I have been increasing the amount I’m contributing by 1% each year.  Anytime I’ve received a large raise, I’ve increased my contribution by a larger percentage.  I’m now up to contributing 12% of my salary to my 401k plan.  I plan to max out my 401k contribution when I start my next job.

Saving as much as you can when you’re young may be difficult, but it is well worth the effort.  Time is definitely on your side!

Happy Decoding!

Fun fact for today – The name 401k was taken from subsection 401(k) of the Internal Revenue Code, which is the federal statutory tax law in the United States.  Haha – I’m not sure how fun this fact is, but it’s certainly educational! =) (Sources: http://www.selfgrowth.com/articles/10-facts-you-need-to-know-about-the-401k-plan & http://en.wikipedia.org/wiki/Internal_Revenue_Code)

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