Free… four simple letters that we all love to see or hear. So then why is it that 25% of employees turning down free money? Employees don’t have to work harder or change jobs to receive it, but by not contributing to their company 401k plan this 25% are missing out on free money. BOGO With Cash
Fifty percent of employers out there provide a 401k plan. This is a retirement savings plan that allows employees to save money while reducing the amount of their income that is taxed. Many companies also do something that is called “matching” employee contributions. I like to think of it as buy one get one free… for your money. These companies are saying to employees, “Put in $3,000 and we will give you $3,000.”
Some companies even go a step further where they will hold a buy one get half of another free. What do I mean about this? If you were to contribute $6,000 to your 401k plan, your company may give you $3,000 free for the first $3,000 you contribute… a buy one get one free type of sale… but then they may give you another $1,500 for the next $3,000 you save… a buy one get another half off sale.
In that example, you would be leaving $4,500 of free money on the table. That’s a couple Mac computers. Clark Howard wrote an article on this topic and found that we are missing out on an average of $1,300 every year in free money. Over an entire working career that could easily exceed $120,000!
Heck, that’s thousands of Mac computers and possibly three or four house down payments! However, many of us have a life to deal with, and that costs a lot. This keeps us from being able to save any money… so what do you do?
Taxes, Savings and Life
We constantly talk about TSL because it is such a powerful acronym/rule of thumb. The idea is to put 30% of your income towards taxes, 20% of your income towards savings and 50% towards life. If you are able to attain this rule of thumb you shouldn’t have a problem. What usually happens, though, is that we find that the life portion goes up and the savings portion goes down. That’s when we have to look at our discretionary spending. It’s that boring advice that we sometimes have to give, but take a hard look at your spending. Ultimately, if you want that free money you will be able to cut some of that spent money that you have discretion over.
If you don’t believe you can do it… I understand. Honestly, I didn’t believe my family could either. However, my wife and I went on Economic Shutdown for the entire month of May, and we were able to uncover money that was slipping through the cracks. We wrote about the whole experience which you can read here.
If you’re in the same mindset I was in April, then I challenge you and your family to try the Economic Shutdown. It’s never fun to be told that we have to cut our spending, however, my Economic Shutdown was a great experience because my family was still able to participate in fun activities like hanging out with friends. We were just much more mindful of our spending and prioritized our activities and budgets.
Pick Your 401k Account
Okay, so by not contributing to your company’s 401k plan means that you could be missing out on free money via the company match. Studies have showed that the average amount of free money that people are missing out on is $1,300. But when it comes time to start contributing to get this free money, many of us are faced with the challenge of whether to contribute to a regular 401k or a Roth 401k… which should you choose?
The Roth 401k is a new addition, and it has caused many of us to be confused simply decide to not contribute to a plan because we didn’t know which to choose. A traditional 401k allows you to add money to your account before taxes. Basically, this would be like getting paid a portion of our salary under the table and not having to report that money until we retire or maybe even later. The other portion of our salary that was not paid under the table would be taxed. This means that less of our salary is taxed today. Win!
However, with a Roth 401k we don’t get any of our salary paid to us under the table. Rather, we pay taxes on the entire thing today, but the benefit is that when we get to touch the money in retirement we don’t have to pay any taxes on that money.
The benefit of both of these vehicles is that if we were to invest the money that we put into either plan, the Roth or the traditional, into an investment we don’t have to pay taxes on gains or dividends. Say we buy Apple and are able to turn $100 into $100,000. We could sell Apple and not pay any taxes on the $99,900 gain. The difference, though, is that if I were to take that money out of the traditional 401k, I would be forced to pay taxes. On the other hand, if I were to take it out of the Roth IRA, I would not have to pay taxes on that.
The next obvious question then, is why would you ever want to use the traditional IRA then? The answer really comes down to when you want to pay Uncle Sam. Do you want to pay him today or decades from now? If you believe that you are paying more taxes today than you will when you stop working, then you should more likely use the traditional 401k. This is because whatever we contribute to the 401k is reduced from our taxed income. Then we aren’t taxed on the money until we take it out later in our life when we will owe Uncle Sam less.
Now if you believe you’ll pay more taxes when you stop working as compared to today, then you would want to use a Roth IRA. That way you’ll pay the taxes today when you’re being charged less by Uncle Sam as opposed to later in life when Uncle Sam will twist your arm for more money.
Get Advice On Your Personal Situation
Not contributing to your 401k can keep you from receiving free money, and if you make the wrong decision of whether to contribute to a traditional 401k or a Roth 401k can cost you money later in life. Both are really important decisions.
If you want some advice on your personal situation, then sign up as a free user of Wela and chat with one of our advisors. You can also set up a free 30-minute consultation with one of our Wela advisors for an objective review of your situation. They will lay out the pros and cons for each decision with regards to your particular situation. If you don’t have time to talk, you can still sign up as a free user and fill out a free game plan. A real advisor will review your situation and provide actionable steps for you and your situation.
Don’t miss out on free money. Figure out your plan of action to start contributing to your 401k, and start raking in that free cash today.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.