Believe it or not, the holiday season is almost here. You may already be preparing to buy gifts, book accommodation for your trip, and plan a feast. However, it is important not to lose sight of the important financial issues that need to be addressed before the end of the year.
This can include a variety of things, such as making a charitable gift or converting to a Roth IRA to reduce your tax liability. However, if you have a 401(k), there’s one more thing you should consider at the top of your list.
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don’t leave money on the table
The federal government requires all 401(k) contributions for 2023 to be made by Dec. 31, which is also the deadline for those who want to claim a 401(k) match for the year. Otherwise, you will essentially lose your free money.
Your match is determined by your employer’s 401(k) matching formula, not just your salary. Typically, for every dollar you contribute to your 401(k), you’ll earn $1 or $0.50, up to a certain percentage of your income. This can easily add up to thousands of dollars in retirement savings.
If you earn $50,000 in 2023 and qualify for a dollar-for-dollar match of up to 5% of your income, you’ll get an additional $2,500. And it may become even more valuable in the future. If he earned a $2,500 match each year for 20 years (approximately $208 per month), his 401(k) match alone would bring him over $118,000, assuming he earned an average annual rate of return of 8% . Note that to get a match you have to contribute at least the same amount of your own money, so you actually need to have at least twice his amount set aside.
This is one of the easiest ways to increase your retirement preparedness. It may also help free up your budget. Let’s say you want to contribute 15% of your income to your 401(k) each year. If you don’t have a match, you’ll have to keep everything for yourself. But if the company gave him a 5% match, he would only need to set aside his 10% of his own funds to reach his goal, and the additional 5% would be immediately available.
If you don’t want to claim a 401(k) match
Depending on your situation, insisting on a 401(k) match may not be your best bet. The first is if you really can’t afford to do so, as you need all your income to cover your bills. When you contribute to a 401(k), you lock up that money. You usually can’t withdraw without penalty until you’re at least 59 1/2, so it’s not a good idea if you think you’ll need it right away.
In this case, we recommend abandoning the match completely or claiming a portion of the match instead of the entire match. Think about what is achievable within your budget and try not to exceed it. You can always try again next year.
Another group you don’t want to claim a 401(k) match are people who are new to the job and don’t plan on staying for very long. Most companies have a vesting schedule that determines when you can keep matching funds with your employer. If you leave your job before it is fully vested, you may lose some or all of your match.
As long as you understand this and like your plan, there’s nothing wrong with contributing to your 401(k). However, if there are high fees or investment options you don’t like, you may prefer to stash your savings in an IRA instead. An IRA gives him more freedom in how he spends his savings, but he can only contribute $6,500 in 2023 (or $7,500 if he’s 50 or older). In comparison, it’s $22,500 in a 401(k) (or $30,000 for him if he’s 50 or older).
How to claim an exact match in your 401(k)
To claim a perfect 401(k) match, you first need to understand how your company’s match formula works. If you are unsure, please contact your company’s human resources department. You can also view these details online if you have one of your 401(k) accounts.
Once you know how much you personally need to contribute to get the perfect match, compare this to the amount you’ve already set aside in your 401(k) this year. For example, if the match is worth him $2,500 and so far he has only set aside $2,000, he needs to set aside another $500 by the end of the year.
Then divide this amount by the number of pay periods remaining in the year to calculate how much each paycheck must be delayed to reach your goal. Make sure you have at least this much already. If not, try increasing your contribution rate until the end of the year.
Again, you may not be able to claim the entire match, especially if you haven’t previously contributed to a 401(k). that’s ok. Please do what you can. But as 2024 approaches, make sure winning games is your top priority. If you start contributing to your account in January, you have a good chance of getting the entire match by the end of the year.
