Wouldn't it be great to start the New Year with a way to double your money? Especially if this technique is legal, quick and simple?
This idea is no secret: it's called a corporate matching contribution.
Let's say that your boss comes to your office and gives you two choices:
a. Your company pays you an annual salary of $100,000, OR
b. Your company pays you an annual salary of $97,000, but it also deposits $6,000 into your retirement plan.
Which choice would you make?
If money is tight (especially if your salary is much less than this), you might find it very difficult to accept the lower salary. There are many, many people who are living on the edge, one paycheck away from disaster.
However, if you can accept a slightly lower salary, then the second choice makes much more sense. Your salary drops by $3,000, but your net worth increases by $6,000. You've just doubled your money!
To make the deal even sweeter, our tax code encourages you to choose the second option. Remember that your $100,000 salary is immediately taxed; you take home significantly less after Washington and California get paid. By contrast, the $6,000 deposited into your retirement plan will not be taxed until you withdraw it in the future, hopefully during retirement. And because your salary now drops to $97,000, your current income taxes are a little lower as well. There are only three requirements to make this work:
1. Your employer has to offer a retirement plan (such as a 401(k), 403(b), or 457) to its employees. According to the Bureau of Labor Statistics (2010), about 60% of companies offer these plans.
2. Your employer has to offer matching contributions. About half do; the median match is 3%.
3. You have to contribute to your retirement plan. This is the hard part that trips many people up. You have to be willing to forego the $3,000 (as in our example above).
Here are three ways to make this hard part easier:
1. Do you have any savings? (Credit card availability and home equity lines of credit do NOT count. I'm referring to a real account at a bank, mutual fund, or brokerage.) If so, here's a trick. If your salary shrinks by $3,000 (as in the above example), that means your take-home pay drops by roughly $2,000 (because your company withholds for federal and state income taxes). Take $2,000 from your savings every year and use it to pay expenses. While your savings balance drops by $2,000, your retirement account balance increases by $6,000. Now you've tripled your money! (Tax caveat here: you will eventually be taxed on the $6,000 in your retirement account. But the key word here is "eventually.")
2. Will you receive a raise or bonus soon? If so, can you take this extra money and steer it all into your retirement plan? This way, your take-home pay remains unaffected.
3. Does your spouse or partner work for an employer with no retirement plan match? If so, (gently) suggest that it might be better for you to receive a corporate match instead. Hopefully, you will both benefit down the road!
There are very few free lunches in this world. Corporate matching contributions are one of them. Don't miss out on an easy way to double your money...legally!
Lou Dagen is a Certified Financial Planner in the San Francisco Bay Area. For 23 years, he has helped clients around the world retire in comfort, educate their children, and increase their net worth. If you have questions that you like answered in future blog posts, please comment below. Or call Lou directly at 925-997-8507.
