MSN Money had an article entitled “Don't pass up free money in a 401(k)” yesterday. A lot of companies offer 401(k) retirement savings plans, which allows you to invest pre-tax wages, subject to certain federal and corporate limits, for use in retirement. The interest and dividends are untaxed until they are withdrawn.
Additionally, some companies match some of their employees' contributions. This is the “free money” that some employees — a surprising number — throw away. It makes sense to contribute at least enough to max out your company's match, even if you don't contribute the maximum amount you can each year. (These amounts are $14,000 for 2005, $15,000 for 2006, plus an additional $4,000 ($5,000) in 2005 (2006) if you're over 50. This amount may be lower if your company caps the contribution amount to a percentage of your salary.)
One extra thing to watch for. If you make lots of money, be careful about how much you contribute. Let's make the math easy. Say your employer allows you to contribute up to 14% of your salary to your 401(k), and matches the first 5% dollar for dollar. If you make less than $100,000 in 2005, you will not “max out” your contribution even at 14% of your salary, and you will get matching contributions the entire way. However, if you make $150,000 and contribute 14%, you'll max out at the end of August. If your payments stop (as they must if you've reached your annual contribution limit) then your employer's matching payments stop as well. (Employer matching doesn't count toward the federal contribution limit.) You'll lose out on $2,500 in matching contributions.
So, if you are a high-salaried employee, figure out what percentage of your pay to contribute so that you come in under the annual federal contribution limit while contributing from every paycheck throughout the year.
