FREE Money: Matching Contributions in Employer Retirement Plans

Tuesday, July 10, 2012

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

Employer retirement plans such as 401(k)s and SIMPLE IRA plans offer a matching contribution to employees who choose to contribute. These plans provide that your employer will match some portion of the amount you contribute to your retirement account.

An example of a 401(k) plan matching formula is 50% of your contributions up to 5% of your annual salary.  For 2012, only the first $250,000 of your salary can be used for plan purposes.

Matching contributions:

  • are contributions your employer makes to your retirement plan account, but only if you contribute to the plan from your salary
  • grow tax-free while in the plan
  • are taxed only when distributed

If you don’t contribute to the plan, you are walking away from “free” money. The more you contribute to the plan, up to the plan’s match limit, the more matching contributions you’ll receive.
 

Example: You contribute $1,500 from your $30,000 annual salary to your company’s 401(k) plan. Your employer’s 50% match of up to 5% of your salary means you’ll receive an additional $750 (50% x $1,500) that’s added to your retirement account.

This tweet from one of our followers agrees with the sentiment that you must take advantage of free money through proactive retirement planning from Day 1.
 

The retirement plan information your employer gave you will tell you how long you have to work before receiving these contributions and the matching formula. But the money may not be yours right away. You may have to work for the employer for a specified period before you are “vested” in the plan. If you leave your employer before you are fully vested, you are not eligible to withdraw the employer match funds and you will lose them.
 

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