Cook Wealth Management Group

Got a Match? 401(k)s and Employer Contributions

The Federal government instituted 401(k) plans in 1978 to help employees put money away for retirement. Convenient, automatic deduction from each paycheck and lower taxable income make 401(k) plans quite attractive. But remember, without the gift of employer matching, a 401(k) is just deferred payment – with a hefty tax bill upon withdrawal.

Since mid 2008, around 5% of U.S. employers have ceased matching 401(k) contributions. However, a recent survey showed that 21% of employers have re-established matching and 23% intend to re-establish matching within the year.* (Small companies with fewer than 500 employees are less likely to do so.)

If your employer does match your contributions, maximize them by selecting your withholding percentage correctly. To determine your contribution rate (so that you can contribute evenly over the entire year,) divide the amount of before-tax contributions you would like to contribute for the whole year by your estimated annual eligible pay.

In this example, with an annual salary of $225,000, you could pocket an extra $5,000 just by lowering your contribution rate:

401(k) Contribution Rate 15% 7%
Timeline & Payments Made Before Maximum Reached Approx. 5 ½ months
(11 payments)
Approx. 11 months
(22 payments)
Total Employer Contribution (assuming 4% match) Approx. $4,125 per year Approx. $9,000 per year
Note: Maximum contributions have not changed from 2009.

If your employer does not offer 401(k) matching and you are in a low tax bracket, you may consider a Roth IRA wherein you may contribute up to $5,000 per year ($6,000 for those 50 and over) and have increased control of where your money is invested.**

To maximize your savings, whether your employer offers 401(k) matching or not, consult your advisor before making any changes to your contribution amount or rate.

* conducted by Fidelity Investments; Employers Easing Back Into 401(k) Matching, by Asher Hawkins, March 31, 2010.
** The 401(k) Rethink, by David K. Randall. Aug. 19, 2009.