“If Your Employer Matches… Get That FREE MONEY Y’all!”

Woot woot! Exciting news…

The winners have been announced for this year’s 401(k) Champion® Awards, and 1 of the 3 winners is from our community here! 

Congrats, Kiersten Peshek! You got $1000 coming your way!… Not a bad prize for just loving your 401(k) — and telling people about it.

Also… Massive shout-out to the contestants and runners up who entered the competition! A lot of people shared stories and essays with me which I loved reading… So I included both some winning essays and a couple other stories below for everyone to check out. (Someone sent me a “what *not* to do with your 401(k)” story which was a fun read too that I’ll include at the end. 😬)

Winning Essay: “Get That FREE MONEY y’all!”

Here are Kiersten’s essay answers and how she encourages others to contribute to her company’s 401(k) plan at work…

If you were to advise co-workers about why they should contribute to (and/or maximize) their 401(k)s, what would you say? 

The big reasons I contribute to a 401(k) are the employer match (if available), the contribution limit, and the tax advantages.

If your employer offers a match for your retirement account this is a part of your compensation package. If you are not contributing enough to receive the full match (or not contributing at all) you are leaving money on the table that future you could use! On top of that, 401(k)s allow you to contribute up to $19,500 per year. That is significantly higher than the IRA contribution limit of $6,000 per year.

Finally, by contributing to a pre-tax 401k, you can reduce your current tax burden because those contributions are not included in your income. Or, by contributing to a Roth 401k, you can reduce your tax burden in retirement as the contributions and growth will come out tax-free. The choice is yours!

Ultimately, receiving the full match is step one. If you have an employer match of 4%, contribute 4% to your 401(k) so that your employer is contributing the full match. Get that FREE MONEY y’all!

Beyond that, it’s up to you and your financial situation on whether you want to go as far as maxing out the 401(k) or contributing to other investment vehicles such as IRAs or taxable brokerage accounts. My goal for 2022 is to max out my 401(k) for the first time and to continue to do so until I retire in about 15 years!

What actions have you taken to inspire non-participants to participate in the 401(k)?

At my previous job, I created a Personal Finance workshop for my co-workers discussing emergency funds, high yield savings accounts, the company 401(k), and what types of assets are available for investment. I presented this workshop to about 60 of my coworkers at different times over the course of two years and provided a copy in our wiki so folks could review it at any time.

One of the big points in my presentation was that our employer has a 401(k) that offers a 4% match if you contribute a minimum of 4% of your salary to the account. That match vested immediately (cha-ching!!) AND they offered what is known as “True Up”. The True Up feature looks at the previous full year of income, deferrals, and matching to determine if your 401(k) needs an additional employer contribution after the end of the year to make sure you get the full 4% match on your earnings. What a sweet way to support and even boost your retirement savings!

With goofy memes scattered throughout to get folks laughing and enjoying the content, I presented this information as simply as possible. At the end I offered to sit with my co-workers as they set up their 401(k)s so they could ask questions of me during the process. Several of my co-workers took me up on that offer. Plus, I had a few reach out to tell me they are now contributing to their 401(k)s when they weren’t before my presentation! It was and continues to be an incredible feeling knowing I was helping spread the good word about taking care of your personal finances and investing in the company 401(k) for retirement.

As an added bonus, I changed careers in May of this year and now, as an Associate Wealth Advisor, I spend much of my time advocating for 401(k)s (and other retirement savings vehicles) with my clients. I truly love helping folks save and invest to meet their retirement goals.

*****

“3 Irrefutable Truths” About Your 401(k)

Here’s a fun response I received from a reader, Randy H. 

If you were to advise co-workers about why they should contribute to (and/or maximize) their 401(k)’s, what would you say?

I work with a lot of younger colleagues, many of whom have recently graduated college and are just starting their careers. I’m at the other end of the spectrum, having worked for decades and am seeing retirement just over the horizon. I have the same pitch for everyone regardless of where they are in their careers. Take advantage of 3 irrefutable truths and contribute as much as possible to your 401k:

Truth #1: Compounding: Einstein called “compound interest” the greatest invention of the 20th century. Who am I to refute that? Your investments will grow and compound over time.

Truth #2: Taxes: You get tax breaks for donating to the 401k! You reduce your taxable income for every $ you contribute AND defer taxes on the gains and income earned on those donations until after you retire. Our plan also offers a Roth 401k option where you don’t get the tax deduction, but you do enjoy tax-free growth on all your contributions so when you retire, you won’t owe a dime in taxes when you need to tap it for that round-the-world cruise!

Truth#3: 2.5% Match: The company matches 50% of your contributions up to 2.5% of your annual salary. Even if you can’t afford to maximize your contributions, at least contribute enough to maximize your match. Don’t leave “free money” on the table!

Even if we didn’t have a company match, it doesn’t take a towering intellect to recognize a good deal when you see one. Put away as much as you can every month. Your future self will love you for it.

**Sadly, Randy didn’t win the 401(k) award this year. But here’s how he said he would have spent the money if he had won…

“I’d probably just put it in ye olde savings account or put $500 each toward our sons’ “matching Roth IRA contributions.” One is in college and another is a senior in high school. We’ve been matching their contributions to a Roth IRA since they’ve been working part-time jobs. Never hurts to start them off on a good foot early, eh?”

LOVE IT!!! 😍 Nice work, Randy! Get them kids hooked as early as possible!

*****

“Dollar-Cost Averaging Through The Good and The Bad Times!”

Olaf from Mile High Finance Guy was a finalist in the competition… Working at Fidelity, he knows 401(k)s like the back of his hand, encouraging everyone to invest consistently…

What actions have you taken to inspire non-participants to participate in the 401(k)?

At Fidelity, everyone I knew participated in the 401k plan. However, my job used to be working as an advisor for the 401k plans that Fidelity administered. I regularly interacted with participants who had never contributed to a 401k or wanted to lower their contributions. 

On every phone call, I made it my goal to encourage and push participants to receive the company match offered, so long as it wouldn’t lead to new debt. I talked countless individuals out of abandoning their contributions during the pandemic plunge that the stock market experienced last year and reiterated the importance of dollar-cost averaging through the good and the bad times.

**Olaf also wrote a nice post about what to do with your 401(k) after leaving your employer. Great resource for any of you switching jobs right now.**

*****

This last story comes from Laura G, who shares a great example of how borrowing from your 401(k) might seem like a good idea at the time, but can also completely backfire. A great warning for anyone with a big account thinking about dipping into the retirement account. Don’t do it!…

“A GIANT Caution to Anyone Thinking of Borrowing Against Your 401k”:

We are long since retired and no longer contribute or own a 401k, but I wanted to share with you our biggest regret regarding one.

Many years ago, when the kids were the right ages, we decided to install a built in gunite swimming pool. The initial cost was $39,000, but the county required a deck and fencing before signing off the final permits, bringing the total to $53,000 at the time. We had the option to do a cash out refinance on our first mortgage, or add a HELOC, or borrow against my husband’s 401k. After doing some research, I decided the 401k route made the most sense, since there were no fees at all beyond a $50 application, no waiting, and we would essentially be “paying ourselves back.”

Fast forward to the completed pool, spa and deck. All is well, until my husband’s division of the company he’d worked for for the last 15 years is sold to a third party vendor and rebranded. He got up everyday and went to the same place, performing the same function, for the same pay, but received a paycheck from a different entity. This action, which we never anticipated, triggered a “job change” acceleration of the 401k loan, and it all became due and payable. We wasted a lot of time trying to argue he hadn’t changed jobs, to no avail. We ended up with very little time and two options, get a loan to pay it off, or have the entire balance be considered a distribution and taxed accordingly. At the time, lenders were backed up weeks and weeks on cash out refinances, and neither a new first mortgage nor a HELOC would close before we owed the funds.

Long story short (somewhat), we couldn’t come up with the funds and ended up owing the IRS and the FTB thousands and thousands of dollars, since on the 61st day the entire amount borrowed was considered an early distribution. We were unable to pay, and both of us received notices our paychecks would be garnished. We ended up going back to the 401k, paying off the nearly $53,000 we still owed for the pool, $17,000 to the IRS in taxes and penalties, and $12,000 to the FTB, in addition to the taxes we had withheld from that early distribution to pay off the first one.

And that’s how our $53,000 pool ended up costing us over $100,000 in fees, penalties and taxes in addition to the original building costs, never mind lost opportunity costs.

A GIANT caution to anyone thinking of borrowing against your 401k: Sometimes the unthinkable actually happens; be prepared for the unimaginable. We are very fortunate in that this costly financial error didn’t derail our entire retirement, but it very well could have. We are reminded, on a daily basis, of how much more money we would have had, had we not made what is easily the biggest, most foolish financial mistake of our lives.

*****

Again, THANK YOU to everyone who participated in the 401k champion competition and I’ll let you know if/when it happens next year!

Cheers and have a great rest of the week!
– Joel

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14 Comments

  1. Chris December 13, 2021 at 9:35 AM

    You can also contribute an extra “catch up” amount of $6,500 if you’re over age 65. My husband and I have never made a whole lot of money but we are debt free including our mortgage and invest. Last year we owed only $18 !! to the IRS because we contributed to his 401k and also have an HSA. I learned many things the last few years by reading personal finance blogs. Just 10 years ago i didnt realize the awesome tax implications otherwise we would have started earlier.

    Reply
    1. Chris December 13, 2021 at 9:36 AM

      Ooops! That’s a typo. Its age 55.

      Reply
      1. Scott December 16, 2021 at 10:45 PM

        I believe it is actually age 50.

        Reply
        1. Joel December 17, 2021 at 3:17 PM

          Good catch @Scott!

          Reply
    2. Joel December 13, 2021 at 11:13 AM

      Congrats on being debt free Chris and taking advantage of the 401k!! I think everyone wishes they started earlier — myself included!

      Good point on the “catch up” contributions. Hand for those who started late, but also great for older people with high incomes who can lower their taxable income a bit more. Cheers!

      Reply
  2. Olaf, the Mile High Finance Guy December 13, 2021 at 9:55 AM

    Thanks for bringing the competition to everyone’s attention, Joel. It was exciting to make it to the final round! Also, thanks for mentioning my article on what to do with your 401(k) after leaving a job!

    Reply
    1. Joel December 13, 2021 at 11:10 AM

      Good stuff, Olaf! Keep spreading the good word out there :)

      Reply
  3. Paul Burckhardt December 13, 2021 at 1:33 PM

    The line of thinking that this is “free money” has always bothered me. Its not free money, its part of your total compensation package. You best believe your employer is paying you 4-5% less to account for the match. I choose of think of it less as free money and more as not letting my employer get away with paying me less… You don’t take your match, they get a 4-5% discount on you.

    Reply
    1. Joel December 13, 2021 at 2:00 PM

      Interesting perspective!

      Reply
    2. Nate December 13, 2021 at 6:08 PM

      This is exactly how I view it. That match isn’t just free money, it’s YOUR money. They earmarked it for you. If you don’t take it its the same as willingly giving back a few percent of your salary to the company. The company gets a discount on your services.

      Reply
      1. Joel December 13, 2021 at 6:34 PM

        Well said! Paul & Nate — You gotta enter the competition next year with these types of notes and rock their world!

        Reply
        1. Nate December 15, 2021 at 9:08 AM

          I was actually a finalist this year. Didn’t make the final cut, but it was cool to make it as far as I did.

          Reply
  4. Impersonal Finances December 14, 2021 at 2:54 AM

    One of my biggest money mistakes was not investing in my 401k right away. I didn’t have a lot of money to put in, but I could have made it work with a small percentage–and that small percentage could have made a huge difference now.

    Reply
    1. Joel December 14, 2021 at 10:36 AM

      Me too IF… And now I’m doing my best to play catch-up and get more money into tax advantaged accounts. Live and learn!

      Reply

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