[Video] Free Money May Exist With This Employee Benefit
by Michelle Smalenberger / September 19, 2017
MICHELLE SMALENBERGER, CFP®
We all like the idea of free money, so I want to walk you through one area where there may be free money available which you’re not taking advantage of.
In your retirement account you’re putting money in yourself and then your employer may also be willing to put money in as well. Let’s assume this is all going into your 401(k) or 403(b). There are a couple of ways this actually happens. Here are the two most common types of plans:
- You may be eligible for an employer match. This may be explained as 100% of the first 3% you contribute and then 50% up to 6%. This means your employer is willing to put in 3% of your salary if you are contributing at least this amount. So they are matching it 100%. Then on the next 3% (up to 6%) they will contribute half of that (50%).
- Or you may be eligible for a profit sharing. In this plan a company doesn’t define a percentage they will match. A contribution by you, as the employee, is not required. Instead this is based on a formula. For example they may contribute an amount equal to your salary times the number of years or hours you’ve worked or been with the company. In this type of account the company isn’t required to make a contribution to you each year or even when they have a profit.
One final detail to clarify is which accounts your contributions get deposited into. You can make your employee contributions into a Roth 401(k) if available. But the employer contributions will be deposited into your traditional 401(k). The reason for this is that your income you are making Roth contributions from is being taxed in the year you earn it. It is not deducted from your total income earned like a traditional 401(k) contribution. But the employer contributions made to you has not been taxed so it needs to be put in the traditional 401(k) where it will be taxed when the funds are withdrawn in later years.
Let’s review the four things that make this money FREE:
Make sure you’re Fully vested in order to get the total account value that has accumulated.
The funds have to go into a Retirement account.
These are contributions from your Employer to you as the employee.
Excuse yourself from spending it today.
To be reminded of the difference between Roth and traditional retirement accounts watch our past videos about tax-deferred and tax-free accounts.
If we can help explain this so you know what is available to you we are happy to walk through it with you.
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