It can be so confusing to know where to save for retirement. Is a Roth IRA better than a Traditional IRA? Would it be better for me to defer in my employer’s 401(k) plan? Should I make my deferral all pre-tax or all after-tax (Roth)? Or would it be better to do a combination?
So many good questions and the answer will always depend on what is best for your situation. But if your employer does offer a 401(k) plan and there is an employer match, it is always a good idea to defer at least the amount required to get the full match. If you are not doing this, you are walking away from free money. An employer match in a 401(k) is a promise by the employer to put money into your 401(k) plan up to a specified amount. The employer has discretion in how much will be matched, but whatever the amount, it may be worthwhile for you to defer an amount that will get you your maximum match.
Let’s say your employer will match 50% on your contributions, up to 6% of your salary. If your salary is $100,000 and you defer 6% of that salary, or $6,000, your employer will provide a match of $3,000. You can contribute more, but it won’t get you a greater match.
Many 401(k) plans today are set up with auto-enrollment. This means you are automatically deferring into your employer plan. Instead of electing to defer you have to elect not to defer. Industry studies show many plan participants in auto-enrollment employer plans are contributing less to their employer-sponsored retirement plan than the amount they need to contribute in order to receive the maximum employer-providing matching contribution. This suggests that the participants are choosing the default contribution rate selected by their employer rather than actually taking the time to figure out which contribution rate will be most beneficial.
Don’t lose free money! If you’re employer offers a 401(k) with match, make sure you are at least deferring the amount needed to receive the maximum match. If you’re not sure how much that is, ask your employer. Make sure you are getting all the benefits of your employer’s 401(k) plan. The more you receive, the more you will save for retirement.
The companies of National Life Group® and their representatives do not offer tax or legal advice. For advice concerning your own situation, please consult with your appropriate professional advisor.
Distributions from a 401(k) are taxed as ordinary income and, if taken prior to reaching age 59 1/2, may be subject to an additional 10% federal income tax penalty.