Do you have any rich relatives or friends? If one of them were to call you up and tell you that if you invest your money in a mutual fund that they would match dollar-for-dollar up to 5% of your investment amount, would you turn them down? I would hope not. Unfortunately this is exactly the sort of thing that I see my friends and associates doing quite frequently. Of course I’m not referring to my best friends rich Uncle, but rather his employers’ 401(k) retirement program, and their matching funds policy!
So let me ask you again, are you ignoring free money? If you are contributing to your 401k plan and taking advantage of the full employer match, then good for you! However if you are like my friend and haven’t bothered to sign up for your 401k for whatever reason, then I’m going to strongly recommend that you quit procrastinating and (as Nike loves to say) just do it! Don’t try to convince yourself that it’s not that important right now with one of your lame excuses… just get it done! When you next go into work send a quick e-mail to your boss, your manager, your HR rep; whoever you need to contact to ask them what you need to do to start contributing to your 401k.
What is a 401(k) and how does it work?
A 401k is an employer-sponsored retirement plan and is named after section 401(k) in the IRS tax code. When you sign up to contribute to your 401k you elect a certain percentage of your gross (meaning before taxes and other withdrawals) income to be contributed to your 401k plan. The percentage that you choose will then be withdrawn from each of your paychecks, and put into your 401k account. These funds are then used to purchase mutual funds or other securities (such as your employers stock).
Pretty simple eh? There is one more benefit I’d like to mention: the tax advantages of a traditional 401k. Any monies which you contribute to your 401k are not taxable (this would not apply to the Roth 401k)! In other words if you make $30k a year and contribute 10% of your pay to your 401k your taxable income will only be $27k instead of the $30k which you actually earned! At a 20% tax rate this comes out to a tax savings of $600 dollars!