Welcome to my blog where I discuss money, investing, politics, and anything else import in the world. I find it surprising that most people in their 30s have very little knowledge or interest in these areas. Of course everyone is interested in money, but very few take the time or have the discipline to properly save and invest it for the future or short term. For those who at least have the interest, I'll write about my experiences and methods of investing, and hopefully give you a head start in investing.

Friday, January 18, 2008

Maximize 401(k) Employer Matching

Be sure to maximize your matching funds from your employer. Money from your employer is basically tax free money that you lose if you don’t properly configure your contribution amount for each paycheck. Typically, a company will match your contributions at some rate up to a percentage. For example, the company may match 50% of your contributions up to 12% of your pay. Or 100% of your contributions up to 6%. Both effectively paid a maximum of $7,750 for 2007 (and 2008). However, to collect that amount, you need to be sure of two things. As a minimum, you must at least contribute up to the matching amount, or 12% in the first example and 6% in the second. Second, you should only contribute over that minimum if you will not max out your yearly limit early. If you do over-contribute, it will reduce the amount you receive from your company matching. For example:

For someone who makes $150,000 and receive 50% match up to 12%:

(a) They should be contributing at 12% per month, but not any more. Since each month they would contribute $1500 and there company would match at $750. After 10.3 months they would be at $15,500 and have a company match of $7750. Maximum contributions for both.

(b) If instead they contributed more at 15%. Each month they would contribute $1875 and be matched $750 (since capped at matching upto 12%). After 8.27 months they would hit the maximum contributions of $15,500, but the match would only be $6200.


wustudybreak said...

thanks for your post. i was just about to take advantage of the match my employer offers.

luck i caught your post in time so that i don't over contribute.

jeffvojtko said...

What is the danger of going over your emplyer match but still remaining under the 15,500 limit for 2008? (tax ramifications vs potential growth in a accessable outside vehicle)

J.D. Fournier said...

The danger is only if you will max out before the end of the year. If you go over, but still don't max out for the year, then no danger, and I recommend it.