Have you ever dreamed about getting paid just for being you, or finding $1 million on the street? You are not the first to dream about free money. But you might be ignoring the easiest way to collect some: Your 401(k) savings plan, a retirement tool that many employers offer.
A 401(k) is a defined contribution plan, meaning an employee and/or employer regularly contributes a certain amount from each paycheck. The contributions gradually accumulate, earning interest from investments with the goal of providing a substantial nest egg for the employee in retirement. As a way to attract and retain quality talent, companies began to offer "matching" contributions to what the employee put in the 401(k). If you aren't taking advantage of this, you are missing out on the opportunity to make more money doing the same amount of work. It's free money.
Understand your program
The reason we say "matching" contributions is because, yes, your employer will put a certain amount of money into your 401(k) for every dollar you put in, but usually only up to a certain dollar amount or percentage of your income. It's important to know how to maximize the employer contribution so you can make the most of the program.
Each plan can also be different when it comes to choosing how to invest. Some give you more control than others. Your employer's contributions can also be subject to a vesting schedule so you may want to consider that carefully before quitting. No matter how your company's 401(k) program works, it's a good idea to take the time to understand it so you can get the most help for retirement.
One of the greatest advantages of the 401(k) is that your contributions are made pre-tax. When your employer sends out your paycheck, the amount you have allotted to the program was added to your account before anything was withheld for taxes. That leaves less of your income taxed and an overall lower tax bill. You pay income tax when you withdraw the funds, after they have time to earn lots of interest -- and, of course, matching. Plus, you have put more money into the retirement fund because it is pre-tax. And the interest your money earns can then earn interest (this is called compounding interest). This all translates into more money for you in retirement.
No match available for IRAs
While IRAs are another great option for retirement savings, no matching contributions are available because this is an account you create yourself. While you are thinking about where to contribute your savings, it's a good idea to prioritize putting money in the account that provides free money first -- that would be the 401(k). Once you have contributed up to the maximum amount for matching (you don't want to leave that available money unclaimed), you may want to also invest in accounts that do not have matches.
While it may be hard to come by thousands of dollar bills lying on the street, you can get free money if you pick an employer that matches contributions and use your 401(k) plan wisely.