I dont understand 401K match - please help

[FirstTimer90]

My company hand a meeting last week with a few of their newer employees (I am one of those) will can start to take advantage of the 401K match program they offer. I asked a lot of questions but still don't fully understand so I hope someone here may be able to help me.


I make about $35,000 per year though I can work overtime or get other commission or bonuses (which I have had a few of in the first 6 months of my employment already).

I am told they will match 25% of 4% - which I think means that they will match 25 cents of every dollar I let them take out of my paycheck to invest in the 401K plan up to a max of 4% of my gross salary.......do I understand that correctly?

I am wondering how I best fill out this paperwork so I have the maximum return? Since each paycheck or surely each year I will likely make a different amount of money, is there a way I can just indicate that I want them to withhold the maximum amount without going over the full amount they will match?!

Thank you to anyone who can help me.
Kara


p.s. I also wanted to ask what a 'vesting schedule' is? I saw that when i was searching on google and it sounds like there is 5 years, or maybe the company sets the number of years.....but there are so many years that if I quit or if they fire me that they would take back their match, is that correct? do they take the interest too? do they also keep the money withheld from my paychecks?

[phantom]

I am told they will match 25% of 4% - which I think means that they will match 25 cents of every dollar I let them take out of my paycheck to invest in the 401K plan up to a max of 4% of my gross salary.......do I understand that correctly?

Exactly!

I am wondering how I best fill out this paperwork so I have the maximum return? Since each paycheck or surely each year I will likely make a different amount of money, is there a way I can just indicate that I want them to withhold the maximum amount without going over the full amount they will match?!

Usually, there's an option to state what percentage you want withheld. If you tell them you want them to withhold 4%, they'll withhold 4% and give you the match on top of that. When your paychecks vary, the amount withheld will vary, but you should be contributing exactly the right amount to get the maximum match.

p.s. I also wanted to ask what a 'vesting schedule' is? I saw that when i was searching on google and it sounds like there is 5 years, or maybe the company sets the number of years.....but there are so many years that if I quit or if they fire me that they would take back their match, is that correct? do they take the interest too? do they also keep the money withheld from my paychecks?

I'll leave it to someone else to explain exactly how vesting works. The exact numbers do vary company to company, and in some places, you are fully vested from the start, so you don't have to worry about it. The money you contribute is always fully vested, so that 4% and any money it earns would be yours to keep no matter what. It's just the match and the earning on the match that you have to worry about vesting for. You should be able to get more information on how it works at your company from your HR department. Once you are contributing to a 401k, you should be able to see how much of your money is vested at any time either on the statements you receive or on the 401k's web site (if there is one).

[btctony]

The vesting schedule determines how much of the employer matched contribution you're allowed to take with you, should you quit or get fired. There isn't a set vesting schedule that everyone uses. It's up to your company, so I would ask them what their vesting schedule is. Until you're 100% vested, you won't be eligible to take the entire matched contribution with you, should you leave.

So let's say ...

1 year - 0% vested
2 years - 50% vested
3 years - 100% vested

Lets say the 4% you put in over the course of a year is 1K. The company match on that is 25% or $250. If you leave the company after your first year, you can't take that $250 with you. At the two year mark, you're 50% vested, meaning you can take 50% of the company match with you, which would be $125. After three years, you're 100% vested. If you change jobs after three years, you would be able to take 100% of the company match, which is $250 in this case.

Of course those numbers would increase, because you're not going to stop contributing after the first year, but for the sake of an explanation on what a vesting schedule is ... You get the picture.

[jIM_Ohio]

My company hand a meeting last week with a few of their newer employees (I am one of those) will can start to take advantage of the 401K match program they offer. I asked a lot of questions but still don't fully understand so I hope someone here may be able to help me.


I make about $35,000 per year though I can work overtime or get other commission or bonuses (which I have had a few of in the first 6 months of my employment already).

I am told they will match 25% of 4% - which I think means that they will match 25 cents of every dollar I let them take out of my paycheck to invest in the 401K plan up to a max of 4% of my gross salary.......do I understand that correctly?

I am wondering how I best fill out this paperwork so I have the maximum return? Since each paycheck or surely each year I will likely make a different amount of money, is there a way I can just indicate that I want them to withhold the maximum amount without going over the full amount they will match?!

Thank you to anyone who can help me.
Kara


p.s. I also wanted to ask what a 'vesting schedule' is? I saw that when i was searching on google and it sounds like there is 5 years, or maybe the company sets the number of years.....but there are so many years that if I quit or if they fire me that they would take back their match, is that correct? do they take the interest too? do they also keep the money withheld from my paychecks?

If you contribute 4% the company will contribute another 1%, which means 5% of your income is being contributed.

The vesting schedule is how soon you can get the 1% company match if you choose to leave your employer.

[FirstTimer90]

My company's vested schedule is 0% for the first two years and then 20% for year 2-3.

My husband and I have started trying to have a baby and I am not sure if I will be going back to work after the child is born. That will likely have me leaving this company before year two and surely before year three.

Knowing these likely events, would my money be better used in some other type of investments other than my company's 401k program or is it the exact same as any other investment choices I would make on my own including fees, options, etc?

I guess what I'm asking is, would I have any downside of doing this even if they dont offer me a match? and then if or when I leave the company can I just take that 401k money and put it into another retirement investment of my choice?

kara

[kv968]

My company's vested schedule is 0% for the first two years and then 20% for year 2-3.

My husband and I have started trying to have a baby and I am not sure if I will be going back to work after the child is born. That will likely have me leaving this company before year two and surely before year three.

Knowing these likely events, would my money be better used in some other type of investments other than my company's 401k program or is it the exact same as any other investment choices I would make on my own including fees, options, etc?

I guess what I'm asking is, would I have any downside of doing this even if they dont offer me a match? and then if or when I leave the company can I just take that 401k money and put it into another retirement investment of my choice?

kara

Say you leave at the beginning of year 3 and the vesting at that time is 20%. You'd have been putting in 4% of your $35k/yr for 2 years. So 4% of $35k is $1400/yr ($2800 total over 2 years) and they were matching you 25% of that so that would be $350/yr of employer match ($700 total over 2 years). However since you'd only get 20% of that match, you'd receive $140 of it if you were to leave.

As far as whether or not to do it...I guess that depends. Are you planning on going back to that company after the kids? I'd also look at how expensive are the fees of the plan and the investments they offer? You do get a tax-deduction from contributing to the 401k but if you're in a lower tax bracket it might be more beneficial for you to just open a Roth IRA instead. The $140 you'd receive is nice but if the plan offerings are really expensive and/or have load fees on them you might just be better off doing it on your own. The $140 you'd get would only be an extra 5% of what you put in.

When you do leave you can roll that money into IRA account of your own choice.

[Like2Plan]

My company's vested schedule is 0% for the first two years and then 20% for year 2-3.

My husband and I have started trying to have a baby and I am not sure if I will be going back to work after the child is born. That will likely have me leaving this company before year two and surely before year three.

Knowing these likely events, would my money be better used in some other type of investments other than my company's 401k program or is it the exact same as any other investment choices I would make on my own including fees, options, etc?

I guess what I'm asking is, would I have any downside of doing this even if they dont offer me a match? and then if or when I leave the company can I just take that 401k money and put it into another retirement investment of my choice?

kara

Kara,
Your question seems like a simple one, but without knowing more it would be hard to make a recommendation.

The first question is would you be better off investing in a Roth (Do you have a Roth option in your 401K)? This is hard to say without knowing your overall tax status--I'm assuming MFJ, but what about your tax bracket? Which would benefit you more tax wise?

The next question is how much of your earnings are you planning to invest? More than the 5,500 IRA limit?
What are your investment allocation goals? Does the 401K offer investment options that you would otherwise invest in?

What are the expenses associated with the 401K? Compare the expenses for the 401K vs an IRA that you would set up on your own--which will cost you the least?

Would you be upset if you did decide to stay with the company for more than 2 years and you missed out on the match?

[FirstTimer90]

The first question is would you be better off investing in a Roth (Do you have a Roth option in your 401K)? This is hard to say without knowing your overall tax status--I'm assuming MFJ, but what about your tax bracket? Which would benefit you more tax wise?

I am not sure, I will ask on monday morning. Though on my own I already have in the past and plan to this year, investing the max to my own Roth IRA. Am I correct to assume I cannot invest in a Roth IRA (of $5,500) on my own and also a company Roth (another $5,500)?
Is there an advantage (outside of the match) going through my company vs. on my own?
I cannot know my tax bracket to be exact as it depends on my husband's income and if our CPA thinks we are best to file joint or not. If joint, we make anywhere from $80-$100k.

The next question is how much of your earnings are you planning to invest? More than the 5,500 IRA limit?
What are your investment allocation goals? Does the 401K offer investment options that you would otherwise invest in?

What are the expenses associated with the 401K? Compare the expenses for the 401K vs an IRA that you would set up on your own--which will cost you the least?

I partly answered this above, but I will be investing at least 20% to my retirement this year ($7,000+)
Can I invest in my own Roth and also a company IRA, and total more than 5,500 each year?

I am planning to invest only in Index Funds with very low fees, they offer less than a quarter percent expense ratio at places like Fidelity and Vanguard. My company isnt charging overly large fees (I dont think), but funds are typically in the 1% to 2% range. The one that initially caught my eye was 1.45% fee.

Would you be upset if you did decide to stay with the company for more than 2 years and you missed out on the match?

I would not be upset either way, I am just hoping to make the right decision in a situation which is possible that I will work there more than 2 years, but at this point in my life, unlikely (so less than 50/50 chance, but not 0% chance).
what do you think?

[FirstTimer90]

When you do leave you can roll that money into IRA account of your own choice.

So when I leave the company, can I take my IRA out of the Fidelity account (for example) and transfer that to a T. Rowe Price account of my own? Thus changing the account from a Mutual Fund to an Index Fund and changing the fees Fidelity and T.R.P. would charge me annually?

Or do I not have that many options? Also, if I plan to invest $5,500 in a Roth IRA on my own, can I still invest in my company 401K, or is $5,500 the cap for investing in Roth + 401K?

[Like2Plan]

I am not sure, I will ask on monday morning. Though on my own I already have in the past and plan to this year, investing the max to my own Roth IRA. Am I correct to assume I cannot invest in a Roth IRA (of $5,500) on my own and also a company Roth (another $5,500)?
Is there an advantage (outside of the match) going through my company vs. on my own?
I cannot know my tax bracket to be exact as it depends on my husband's income and if our CPA thinks we are best to file joint or not. If joint, we make anywhere from $80-$100k.

One advantage for you is you can put more than 5,500 in a tax advantaged retirement account. It is important to understand the tax implications (especially before you do something). It might be a good idea to talk to your CPA to discuss which option would work better for your situation.

I partly answered this above, but I will be investing at least 20% to my retirement this year ($7,000+)
Can I invest in my own Roth and also a company IRA, and total more than 5,500 each year?

Yes, you can invest in both a Roth and a 401K. You can invest up to 5,500 in an IRA and up to 17,500 in a 401K.

I am planning to invest only in Index Funds with very low fees, they offer less than a quarter percent expense ratio at places like Fidelity and Vanguard. My company isnt charging overly large fees (I dont think), but funds are typically in the 1% to 2% range. The one that initially caught my eye was 1.45% fee.

Ah--fees can have a huge impact on your portfolio over time.
Here is an interesting program that aired on Frontline called The Retirement Gamble Link to Frontline The Retirement Gamble

Background from the program
"It’s this simple: Fund fees can erode as much as half or more of your prospective gains.

For the sake of dramatizing the point, John Bogle, founder of Vanguard, the world’s largest mutual fund company and pioneer of low-cost index funds, gave me a startling example while we were filming. Assume you are invested in a mutual fund, he says, with a gross return of 7 percent, but that the mutual fund charges you an annual fee of 2 percent.

Over a 50-year investing lifetime, that little 2 percent fee will erode 63 percent of what you would have had. As Bogle puts it, “the tyranny of compounding costs” is overwhelming."

I would not be upset either way, I am just hoping to make the right decision in a situation which is possible that I will work there more than 2 years, but at this point in my life, unlikely (so less than 50/50 chance, but not 0% chance).
what do you think?

Personally, I don't like to leave any compensation on the table (if I can help it. ) It sounds like you are planning to invest more than the limit for an IRA anyway. You could fund your 401K up to the match. You could then take the rest of the money you were planning to invest for retirement and invest it in an Roth (assuming that is the best tax move for you).
When you leave your company, you have the option of rolling over your 401K funds into an IRA.

[GrimJack]

In both 401k situations, investing at least enough to get the match is like getting free money; not only do you get normal return on investment, you get the match. If your ROI is 5-8%, even if you only stay long enough to qualify for 20% - your ROI is 25-28%. When I worked at Oxford University Press back in the 90s, I discovered that one of the accountants had not even bother to open a 403b that had a 50% match on the first 5%. I was stunned; she tossed away about $4,000 of free money - imagine just throwing 8 500 dollar bills into your garbage disposal.

[FirstTimer90]

In both 401k situations, investing at least enough to get the match is like getting free money; not only do you get normal return on investment, you get the match.

But what if I don't stay long enough to get the match? Am I better off investing that money in another way for retirement, or am I still getting some other type of advantage by going through my company's 401k program?

[kv968]

So when I leave the company, can I take my IRA out of the Fidelity account (for example) and transfer that to a T. Rowe Price account of my own? Thus changing the account from a Mutual Fund to an Index Fund and changing the fees Fidelity and T.R.P. would charge me annually?

Or do I not have that many options? Also, if I plan to invest $5,500 in a Roth IRA on my own, can I still invest in my company 401K, or is $5,500 the cap for investing in Roth + 401K?

I think you meant to ask, when you leave the company can you take your 401k and move it. Yes you can roll it over to T. Rowe Price, Vanguard, etc...

You can still invest in your 401k even if you put $5500 in your Roth. In fact, my suggestion would be, if you're planning on putting $7000 into retirement this year, to max out the Roth and then put the remaining $1500 into the 401k. Reason being, your company is only going to match you on 4% of your gross income anyway which would be $1400. Anything above that (the extra $100 in this case) is just extra money you're just putting in.

And if you did put all of the $7000 in the 401k, the fees on the funds probably eat up almost, if not, all of the match anyway.

For example, using the scenario I put out before where you'd be vested $140 of company match after two years...Say you were to put that $7000 in the fund that you said had an expense of 1.45% instead. You'd be "paying" $101.50/yr in expenses. Thereby wiping out any company match you'd receive. Of course its not as cut and dry as that since there's performance to consider, tax deductions and the expense of other funds you'd be in instead, but you could get much cheaper funds in your own IRA.

[FirstTimer90]

I think you meant to ask, when you leave the company can you take your 401k and move it. Yes you can roll it over to T. Rowe Price, Vanguard, etc...

you are correct, that is what i meant.

Of course its not as cut and dry as that since there's performance to consider, tax deductions and the expense of other funds you'd be in instead, but you could get much cheaper funds in your own IRA.

I know the advantage of a Roth IRA is that the money is taxed today but grows tax free until I cash out after i retire.
But would you please explain to me how a 401k works as it relates to taxes? Is this money, not taxed, that grows inside the 401k and is only taxed after I cash out? or is that a regular IRA? I am a little confused so any info would be a great help, thank you!

[Petunia 100]

I know the advantage of a Roth IRA is that the money is taxed today but grows tax free until I cash out after i retire.
But would you please explain to me how a 401k works as it relates to taxes? Is this money, not taxed, that grows inside the 401k and is only taxed after I cash out? or is that a regular IRA? I am a little confused so any info would be a great help, thank you!

You have it right. The money goes in untaxed, grows untaxed, and is taxed as you take it out.