Does your employer have a 401K or 403(b) retirement savings plan with a company match? If so, read on to find about the FREE money you may be missing.
Many companies and government agencies provide retirement savings plans called 401K or 403(b) plans for their workers. You can use these plans to save for your retirement by putting part of your salary into the plan and investing it in stock or bond mutual funds or in interest-bearing money market funds.
One of the cool things about 401K and 403(b) plans is that the money you put into them is not counted as “income” for tax purposes. That means you won’t pay income tax on that money in the year that you deposit it into the plan. You don’t pay any income tax on the money you deposit until you withdraw it during retirement and, by that time, your income tax rate should be lower than it would be if you had to pay tax on the money now.
Another cool thing about these plans is that you can earn on money on your money without having to pay income taxes on those earnings. You don’t pay money on the earnings in your 401K or 403(b) plan until you withdraw that money during retirement and, by then, your tax rate should be lower than it is now.
But, the very best thing about these plans is that many employers will match what you put into the plan up to a certain dollar amount or a certain percentage of your salary. This is totally FREE money! It’s not counted as “income” for tax purposes in the year it is deposited by your employer and it can grow tax free as long as it in the plan. You won’t have to pay income taxes on the match or your earnings on the match until you withdraw the money in retirement and, by that time, your tax rate should be lower than it is now.
Many workers are missing out on this FREE money from their employers because they are not putting enough of their own money in the plan to get all the matching money available from their employer. This is the same as rejecting your employer’s offer to increase your salary by $500 per year. If you think you would never turn down a salary increase, that is exactly what you are doing when you don’t put enough money into your 401K or 403(b) account to get the full amount of your company’s match. It makes no sense but that’s what millions of people are doing every year.
Let’s suppose your salary is $40,000 per year and your company will put $500 in your 401K or 403(b) account this year if you put in $500 of your salary this year. That is a whopping 100% return on your $500 investment in just one year. No other investment on the planet would give you a 100% return on your money in such a short time.
If you continue working for this company for 10 years and get the full match each year, you will have $5,000 of the company’s money in your retirement account along with $5,000 of your own money for a total of $10,000. For most of that 10 year period, you will have had a chance to earn something on that money through your investments. And, all of it (the initial deposits made by you and your company as well as the earnings on that money) will go in and grow tax-free until you withdraw the money in retirement.
Before you try to come up reasons why it would logical not to put the full $500 a year in your retirement plan and earn the full $500 company match each year, consider this: It only takes $1.37 per day for you to save $500 in one year. You will never miss this small deduction from your salary. So, don’t walk but RUN to the human resources department and submit the paperwork for your deposits to your retirement plan!