Don’t pass up free savings — you might sorely regret it.
People who save for retirement in an IRA get a lot of leeway when it comes to making contributions. That’s because you can put money into an IRA up until the following year’s tax-filing deadline.
In other words, you have until mid-April of 2024 to contribute funds to your 2023 IRA. You don’t have to stress yourself out to finish funding that account by Dec. 31.
Employer-sponsored 401(k)s work differently, though. With a 401(k), you can’t contribute for 2023 beyond 2023, so money you want counted for this year has to be in your account by Dec. 31. And if you haven’t yet claimed your 401(k) match in full, you’ll want to get moving very soon.
Don’t give up free money
Some employers simply provide employees with access to a retirement plan and don’t match worker contributions. But if your company offers a 401(k) match, you’ll want to make sure to contribute enough to its plan by Dec. 31 to claim that money in full. So if your company matches 100% of contributions of up to $5,000, and you’ve only put $3,500 into your 401(k) to date, you may want to talk to your payroll department about adjusting your contributions ASAP so you’re able to get $1,500 more into your account by year’s end.
Why the urgency? First, giving up free money is something you generally don’t want to do, since you don’t get so many opportunities in life to enjoy a benefit like that.
But also, when you give up a 401(k) match, you don’t just forgo that principal contribution on your employer’s part. You also lose out on growth.
Let’s say your 401(k) generates an average annual 9% return, which is roughly in line with the stock market average. Let’s also say you’re $1,500 shy of claiming your employer match in full.
You might think, “Eh, what’s an extra $1,500 really going to do for my retirement?” But actually, it could do a lot when you invest it.
Let’s say you’re 25 and don’t retire until age 65. That means that $1,500 has 40 years to grow. At an average annual 9% return, you’re talking about turning $1,500 into over $47,000. Now, that’s a lot of money to pass up.
Heck, depending on your future lifestyle and inflation, $47,000 could be enough to cover an entire year’s worth of bills. So yes, giving up a seemingly small employer match in your 401(k) is, in fact, a big deal.
Finish funding your 401(k) before it’s too late
The money that goes into your 401(k) comes out of your paychecks. But you don’t know how long it’ll take your company’s payroll department to process a change to your contribution rate. So if you need to increase your contribution rate before Dec. 31 to claim your employer match in full, the time to take action is now.
It might take a few pay cycles to process that change. The sooner you get the ball rolling, the less likely you’ll be to end up forgoing free money for your retirement savings.
