• News
  • Finance

Take advantage of company contributions to retirement plans

Related Special Reports

It seems like a no-brainer: If your company offers a 401(k) or other employer-sponsored retirement plan and also matches a portion of your contribution, why wouldn’t you want to participate?

Yet there is ample evidence that not every eligible worker is taking up their employer on the offer of free money. According to the Financial Industry Regulatory Authority, nearly three out of 10 workers do not contribute enough to their 401(k) to receive their full employer match.

This is especially prevalent among young workers between the ages of 20 and 29 — 43 percent of whom don’t take full advantage of the matching contributions.

Of course, not all retirement plans provide matching, and during the depths of the recession, a lot of companies that were contributing funds to workers' retirement accounts were forced to suspend the activity.

A study by AON Hewitt found that 23 percent of employers suspended or reduced company contributions in 2008 and 2009. However, more than half reinstated the matching in 2010, and another 18 percent has taken similar steps this year, with more planning to resume matching in 2012.

The benefits of matching a portion of employee contributions are obvious. First, it’s free money. Second, it will significantly enhance the amount of money you are able to save and invest for retirement.

In a report, “Why Leave Money on the Table,” FINRA explains how contributing to a 401(k) plan and accepting the matching funds from your employer can boost your retirement savings.

It cites the example of a 30-year-old worker making $40,000 a year and contributing 3 percent — $1,200 — each year to the retirement plan. Assuming the employer matches 3 percent of the worker's pay — a common matching percentage — that would put an additional amount into the plan each year.

That means that by the time the worker reaches 65, he or she would have invested $42,000 into the retirement account, and the employer would have also given the worker a similar amount, bringing the total amount contributed to the 401(k) to $84,000.

Factor in wage increases and the growth from the investments in the account and the person involved would have been able to amass a pretty handsome amount of money to fund their years after working.

Of course, not every worker has the benefit of an employer-sponsored retirement plan or matching contributions. In that case, it would make sense to start your retirement savings with a Roth IRA. The reason is taxes.

Most 401(k) accounts are tax-deferred, meaning the money you contribute is not taxed in the year it is earned, but those dollars, along with any growth in the account, will be taxed as ordinary income when the funds are withdrawn in the future either by the account owner or beneficiaries.

On the other hand, the contributions to a Roth IRA are not tax-deductible in the year you earn the money, but all future growth is completely tax-free to the owner or beneficiary.

As a general rule, tax-free is always better than tax-deferred. So, talk with your tax adviser to see which plan is right for you. But, by all means, if available take your employer up on the offer of free matching contributions.

User Response
0 UserComments