Folks in my profession often refer to an employer-sponsored retirement plan match as “free money”. Are you lucky enough to work for a company who 1) offers a retirement plan, and 2) has a contribution match? The advice that follows “yes” to those questions, is typically to take full advantage, if at all possible. A message of caution to high earners or lofty savers is to work with HR and your financial advisor. Plan ahead to ensure you are taking full advantage of ALL of this free money.
To pocket this employer benefit, an eligible employee must choose to defer a specific portion of their salary to their employer’s retirement plan account. Employers can then fully or partially match the salary deferral in the form of an employer contribution, directly to the employee’s retirement account on their behalf. Free money for contributing to your own retirement savings is a win-win. The IRS does however limit contribution amounts, which can create complications for employees who wish to take full advantage of their employer’s match.
Consider this: Bob has a $150,000 salary. As an employee benefit, his employer matches 401K contributions at 10% of Bob’s salary. Bob is eager to save for retirement and decides to defer 20% of his annual salary ($2,500/month) to his 401K. At this rate, Bob will exceed his employee contribution limit of $20,500 (2022 IRS limit) for the whole year by the end of September and must stop his future contributions. Since Bob cannot make employee contribution for October through December, he will not receive his employer’s 10% match for those three months. Consequentially, $3,750 ($1,250/month x 3 months) that could have been Bob’s is left in the company bank account. Matching rules are matching rules, even if you stopped contributions because of good reason, such as meeting the annual limit.
A small change to his benefit election, could mean the difference between receiving the full advantage and leaving “free money” on the table. If you wish to take advantage fully of this prized employee benefit, you may check with your HR department to see if you are able to contribute a set dollar amount instead of by percentage of pay. You or your financial advisor can easily calculate the appropriate salary deferral per pay check by reviewing the annual IRS limit or your remaining limit and dividing by the number of pay periods remaining in the year.
I am fortunate to have this benefit at my firm. It has been rewarding to see how participating in my firm‘s plan helps grow my retirement savings faster. You bet that I am taking advantage of the full benefit, and encourage you to do the same!
It’s matching season! With the year still young, you have plenty of time to reconfigure your max employee contribution per paycheck and update percentage or dollar amounts. Go get your free money!
Published in the Victoria Advocate
Beth Koonce is a CFP® Professional and Lead Advisor with KMH Wealth Management, LLC.