Tax & Financial Tips Archive
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Date: June 6, 2012
Subject: Maximizing your Employer’s Contribution w/i 401K (TSP)

This is
G&G Associates
Tax & Financial Consulting Services

Maximizing your Employer’s Contribution
Within Your 401K (TSP)

Karibu (Welcome) G&G Readers,


If you saw an ad like that, you'd probably ask, "what's the catch?"

This is strictly on the up and up. Your employer may give you money every time you contribute to your 401k plan, if it offers a matching contribution.

"No fair," you may say. "That's like telling me to eat my vegetables before I can have dessert."

Yep…Sorry, but a little character-building never hurt anyone. Besides, would you leave a $100 bill lying on the street? Taking advantage of your employer's match may mean that you can retire sooner, or that retirement might be nicer than you originally expected.

Some workers don't take full advantage of the matching contribution their employer offers. According to the Profit Sharing/401k Council of America's (PSCA) latest survey of profit-sharing and 401k plans, more than 20 percent of employees don't contribute to their plans. Not all of those employees are in plans offering a match – but, about 78 percent of plans offer some kind of matching contribution, the PSCA said. Also, the figure doesn't count workers who contribute to their plans, but don't put in enough to get the entire employer match.

Your employer is not required to make any contribution to your plan at all. So, why are you passing on its generosity if it does offer one?

To get the full benefit of the match, it helps to know your plan's rules, including when and how to contribute. Here's what you need to know.

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Many folks on a tight budget may think they can't afford to save for retirement. And an employer match may not seem generous enough to make it worth their while.

I repeat: IT'S FREE MONEY !!!

But, there's more to it than that. Consider the tax advantages. Here's an example to show how saving in a 401k with a matching contribution is affordable and profitable.

Suppose you are single and earn $30,000 a year. That puts you in the 27.5 percent tax bracket. For every dollar you earn you must pay 27.5 cents in taxes, leaving you 72.5 cents to live off.

Suppose you save that same dollar in your 401k plan. Because 401k contributions are made on a pre-tax basis, the full dollar goes into the account. But, at the same time, you have also reduced your taxable income by $1. That means you saved 27.5 cents in taxes and got a dollar in savings.

Sounds like a good “PLAN” right?

Now, suppose your employer kicks in an additional 50 cents for every dollar you contribute. (That's a fairly common match.) Your $1 contribution is now worth $1.50. (a 50% gain on your dollar).

Between the tax savings and match, saving $1 in your 401k plan gives you an extra 77.5 cents to put toward your future that you wouldn't have had if you took the dollar as income and spent it today. (But remember, you will pay income tax on the money when you withdraw it.)

Down the road, getting a match makes it easier to have a nice retirement. "It means you can retire sooner than you otherwise might be able to do, “ONLY” if you have an ‘Obtainable’ plan.”You might be able to enjoy a higher quality of living."


So, how can you have your cake and eat it too? Especially since most employer sponsored 401K plans only average about 3-5% a year. Doubt my numbers check your plan or setup an appointment with me and I’ll show you how.

The easiest way is to make sure you contribute enough to your 401k plan to get the full match. Most employers will only match a portion of your contributions.

A common match is for the employer to contribute 50 cents on the dollar, up to the first 6 percent of salary you contribute, according to the PSCA. Suppose your employer offers that match. If you earn $25,000 a year and contribute $1,500 (6 percent of your salary) you will get the full match of $750.

If you contribute beyond $1,500, say $1,750, that's good for your retirement future, but your employer won't match the additional $250. If you contribute less than $1,500, say $1,000, your employer will only match that amount and you'll leave dessert (money) on the table.

But, since most retirement plans don’t realistically keep up with inflation, again average 401K return is (3-5%). What if you contributed enough to match your employer’s contribution, then any above and beyond contributions to higher yielding retirement type accounts?

Seems like an even better plan … literally allowing you to have your cake “with icing” and eat it to. And let me caveat that … healthy icing since I’m watching what I eat.

Your employer’s summary plan description will tell you what your plan's match is, or just contact your jobs human resource department so you can adjust your contributions. Still confused … contact G&G Associates to setup an appointment and we’ll help you out.


To get the most out of your employer's matching contribution, you need to know when your employer makes the contribution.

Federal rules require employers to make their contributions to your account no later than the final tax deadline, plus extensions, for the tax year. So, you might not see a match reflected on your 401k statement for months after the tax year ends. Many employers, typically, make their contribution when you make yours.

Clients commonly ask … whether it's worth it to make all of their 401k contributions early in the year to get ahead.

It may not be. Some employers only make a matching contribution when you contribute. If you contribute everything early in the year, and then don't contribute during later months, you may miss out on matching contributions in the months you don't contribute. Check with your benefits department to find out how and when the match is made. Then, adjust your contributions so you get the full match.


It's also important to understand vesting rules for your employer's contributions.
Even though your employer may make the matching contribution at the same time you make yours, it may not be ‘your property right away.’

While many employers make a match to entice their employees to join their company and to contribute to the plan, some require that you work at the firm a certain number of years before the match becomes your property. This is incentive to keep you on staff.

This is perfectly legal, and vesting requirements for employer contributions are common in 401k plans. However, you don't have to wait for your own contributions to vest.

The PSCA, points out that many employers don't recoup the cost of recruiting and training a new employee until after they have at least two years of service. "The companies want them to stay for a while. They use the (401k) plan design to encourage people to stay longer.”

Plans have two types of vesting schedules: graded and cliff.

With graded vesting, you own an increasing portion of the employer contribution each year you are with your company. If your company had a five-year graded vesting schedule, you could be 20 percent vested after one year, 40 percent vested after two years, etc. By law, the longest graded vesting schedule a 401k plan can have for employer matching contributions is six years.

With cliff vesting, the employer contribution goes from zero to 100 percent vested after a set period of time. So if your vesting requirement is three years and you leave your company after two years, you won't get any of the employer contributions. Currently, the longest cliff-vesting schedule allowed by law for employer matching contributions is three years.

Because you may have to wait for your employer matching contribution to vest, you may want to delay a job change if you are a short time away from vesting.


Employers offer matching contributions for several reasons. The primary one is to get employees to participate in the plan. (It's sort of like your employer promising to give you dessert if you eat all your vegetables.)

Without a match, fewer folks are willing to save in the plan, which is understandable if you are only making 3-4% in your retirement. But again … free money is free money.

If you want to know how to protect yourself and learn how to take advantage of your employer’s 401K plan, then you need to become a GGIS Subscriber. I will share many of these ideas here in the weekly G&G e-newsletter but if you want the meat, you need to become a paid GGIS Subscriber. Remember, if you sign up you get a free one hour financial consultation (a $200 value).

So … Sign up today!!!

Remember … “if you fail to plan, then you have planned to fail.”

As always…feel free to pass this information on to anyone you think is interested in increasing their tax & financial IQ.

If you need a one-on-one consultation to learn how to implement these investments or any other on the GGIS portfolio, feel free to contact me to setup an appointment.

If you missed any past G&G newsletters, click on link below for the archive:

Meda Ase p (Thank You Very Much),

Asar Maa Ra Gray
Tax & Financial Consultant, RFC
G&G Associates
757-251-3757 office
866-361-3872 toll free fax

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LEGAL NOTICE: This work is based on what I’ve learned as a financial researcher and analyst based SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. It may contain errors and you should not base investment decisions solely on what you read here. It’s your money and your responsibility. Nothing herein should be considered personalized investment advice.


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