You Can’t Afford Not to Match

By “match,” I am not talking about your work outfit (although that goes without saying). I am talking about your employer’s matching contributions to your 401K.  401K  (so-called because of the section of the Internal Revenue Code that governs such plans) is a type of retirement plan that allows individuals to contribute pre-tax dollars to a fund and have the savings grow tax-deferred until withdrawn at retirement.  Most recent graduates do not get paid enough as it is, so I am always quite surprised to hear about people who did not even bother to find out if their employers offer matching contributions. Hello? It is free money!

Leaving aside the arguments that recent graduates are too young or too poor to save for retirement, let’s talk numbers. For example, let’s say you make $35,000 a year and your employer offers a matching contribution to your 401K at a rate of 50 cents for every dollar you contribute, up to 6% of your salary. This means if you put in $1,000 for your 401K ( less than $20 each week), your employer will just give you another $500. If you make the maximum contribution of $2,100, your employer will give you more than $1,000 in free money. Some companies match at a higher rate and/or set even higher matching ceilings. So while it may be hard, you should really figure out a way to put aside enough money to maximize your matched contribution. In the end, you will be receiving free money from your employer and it will all be growing exponentially in an account somewhere.

Unfortunately, in this economy, many employers are scaling back their costs by cutting out the matching contribution benefit, in which case you should no longer contribute to your firm’s 401K but set up a Roth IRA (more in the next post).

The other major component of matching contributions is how long it will take for them to be 100% vested – meaning they belong to you completely even when you quit. Some firms, such as mine, are 100% vested when they are matched; others require that you work for a few years with them. If you are not sure how long you will stay at your current company, then you should also consider opening your retirement account elsewhere.

Bottom line – this is a HUGE benefit that your employer is providing and you would be crazy not to cash in on it.