March 14th, 2012 by Loren Elms
The phrase catches your attention doesn’t it? After all, who doesn’t want free money? Well many employers actually do offer free money—through a retirement plan that matches employee contributions dollar for dollar up to a certain percentage. Simply enroll in your company 401(k) plan and contribute 3% to 5% of your pay, and you could get what amounts to an instant 3% to 5% raise!
Yet many employees are leaving this free money on the table. According to a survey by Hewitt Associates, 22% of 401(k) participants do not contribute enough to get the maximum company match.
Haven’t started yet? Servant HR administers many different retirement plans for our clients. Look through your employee handbook or talk to your benefits administrator to see what plan your company offers. Find out when you can participate in your employer’s plan, and follow these two simple steps.
1) Join as soon as you are eligible.
Ask for a copy of the plan booklet (called the Summary Plan Description, or SPD) to learn your plan’s rules and requirements. Retirement plan rules vary. Some plans require that employees be at least 21 years of age and have a year of service with the company before they can participate. Even part time employees can sometimes be eligible if they work a certain number of hours per year.
2) Contribute as much as you are able.
If you think you can’t afford to have much taken out of your paycheck, consider starting with a small percentage and increasing it by just 1% or 2% each year. Or, you could plan to increase your salary deferral any time your salary increases. Your contributions will be deducted from your salary pre-tax, and your investment will continue to grow, tax-deferred, until you take it out. To make changes to your contributions, request the proper form from your plan administrator. You might also have online access which allows you to make deferral changes through your plan’s website (though some plans only allow deferral percentages to be changed at certain points throughout the year).
Don’t worry. Any money that is deducted from your paycheck for your 401(k) plan, and any earnings on that money, is 100% “vested”—meaning that it will always be 100% yours. (There are some restrictions as to when/how you can take that money back out of the plan.) You do not necessarily have an immediate right to contributions made by your employer, however. Ownership of those funds is earned by providing years of service to your employer, according to a “vesting schedule.” These schedules can vary, so you should review your SPD for the specifics of your plan.
Your employer’s retirement savings plan is a key component of your future financial security. It is important for you to understand how your plan works and what benefits you will receive. Servant HR has helped many employees to understand and receive these benefits. And although you may not be able to contribute the maximum allowed by the IRS each year ($17,000 in 2012—$22,500 if you are over 50), you should try to contribute at least enough to gain the benefit of any matching funds your employer offers. Remember, it is FREE MONEY!
Learn more about the benefits of retirement savings at http://www.dol.gov/ebsa/pdf/savingsfitness.pdf
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