Is Your 401(k) Still Matching?
Author, Speaker, Inventor and Consultant, Max Jaffe, CPA, helps individuals keep more of the money they make
Editors note: Max Jaffe is a regular guest contributor to this blog.
Today, many companies are cutting back on expenses to make earnings estimates and offset downward pressure on stock prices. Salaries have been frozen and some people have even taken a pay cut. The subsidy on benefits has been reduced, such as health insurance, so the employee pays more towards the cost, and may have even received a reduction in coverage.
One of those expenses being cut is the 401(k) company match in which most large public employers participate. This means when employees contributes to their 401(k) account, the company matches it, up to a point, usually a percentage of the employee’s salary. For many companies, that matching contribution has been reduced or even eliminated altogether.
401(k)’s are good deals for many reasons. First, the company match is free money. If the company is matching, say 5% of the employee’s salary, the employee in effect is receiving a 5% bonus; however, the employee must put in the 5% in order to receive the match. How cool is that? Secondly, the employee’s contribution is tax-deferred. This does NOT mean tax-free. What it means is that the employee will not pay federal income taxes on their contribution. So, if the employee makes $40,000 a year and contributes $5,000, their W-2 at the end of the year will reflect wages of only $35,000, thus saving taxes on the $5,000 contribution. When the employee retires, and withdraws the $5,000, the amount is taxed at that time. Presumably, at that time, the retired employee will be in a lower tax bracket than when they earned the money. Last, the amount in the 401(k) grows tax-deferred, so it can grow to a larger amount a lot faster, as Uncle Sam is not reaching in and taking his share of the employee’s growth.
For 2009 an employee can contribute up to $16,500 tax-deferred if they are 49 or younger; $22,000 if they are 50 or over. (They have to have had their 50th birthday by December 31st.)
The tightening of the economy has put a big squeeze on 401(k) savings. First, if the employer decides to no longer match the contribution, there’s obviously less money going into 401(k) accounts. Some employees feel that there is no incentive for them to save if it’s not matched. This simply isn’t true. They should be saving more because they are no longer receiving any help from their employer and they need to make sure they’re securing their retirement. Additionally, they still get to defer their income dollar-for-dollar for their contributions. Furthermore, it still grows tax-deferred.
What other authorities have to say
Here are some figures reported in The Wall Street Journal on March 26, 2009, which were in a report released by Spectrum Group. The Spectrum Group surveyed 150 plan sponsors in February, 2009 and found that 34% of U.S. employers have reduced or eliminated the company match in the last 12 months; another 29% plan to make changes in the next 12 months. The margin of error is plus or minus 8%. Another study by Spectrum polled 400 active plan participants and found that 20% had reduced their contributions and another 5% plan to do the same in the following 12 months. Interestingly, 14% said they plan to increase their savings. You rock!!!
If you have to decide between the mortgage payment and saving for retirement, this can be an issue. If this persists, you will have nothing for that time in your life when you won’t be working. All the more reason you need to get a grip on your cash flow. The best way to do that is to track everything you spend your money on. The Financial Fuel Gauge™ is a great tracking device; I have never missed a payment and have never paid one dime in credit card interest.