A great 401(k) lets you keep the match Plans offer a number of different matching formulas, with some of the most common being 50% of the first 6% of earnings and 100% of the first 3% to 6% of pay. The more generous the match, the better for participants — to a point. Many plans have long vesting periods for employer contributions. You might not have a right to any matching funds until you’ve worked for the company for three years, for example. After you hit the three-year mark, you would own 100% of any match you’ve earned and 100% of any future matches. Another common approach is a six-year “graded” vesting schedule. You might have to work two years before you get 20% of the match. You would get another 20% after each year of service until you were 100% invested in past and future matches after year six. But long vesting periods have come under fire because of their negative impact on today’s more mobile workers. A 2016 report by the U.S. Government Accountability Office found if a worker left two jobs before vesting, at ages 20 and 40, the matches they forfeit could be worth $81,743 at retirement. A growing number of plans give employees immediate ownership of matching funds — 44.2% in 2021, up from 38.5% in 2017, according to Hattie Greenan, director of research and communications for the Plan Sponsor Council of America. You’re always 100% vested in your own contributions, but it’s important to understand any restrictions imposed on your employer’s contributions — and perhaps push for shorter vesting periods. A great 401(k) gives you more ways to save Most plans today offer a Roth 401(k) option that allows participants to put away money that won’t be taxed in retirement. Contributions to a regular, pre-tax 401(k) give you an upfront tax break, but withdrawals are taxed as income. Contributions to a Roth 401(k) don’t reduce your current tax bill, but withdrawals in retirement are tax-free. Financial planners often suggest clients have money in both pre-tax and tax-free accounts to better manage their tax bill in retirement. The IRS limits pre-tax and Roth 401(k) contributions to $22,500 in 2023 for people under 50 and $30,000 for people 50 and older. But total contributions — by participants and their employers — can be up to $66,000 for people under 50 or $73,500 for those 50 and older, if the plan allows it. Some plans offer the option to make additional, after-tax contributions, which can help you stuff a whole lot more money into your retirement plan. Let’s say you’re under 50 and max out your pre-tax contributions. Your company contributes a $6,000 match, for a total of $28,500. If your plan allows, you could contribute as much as $37,500 to the after-tax option to meet the combined employer and participant contribution allowance.
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