It's hard to believe, but the holiday season is nearly upon us again. You might already be gearing up to buy gifts, book travel accommodations, and plan feasts. But it's important not to lose sight of important financial matters you need to take care of before the end of the year.
This can include a lot of things, like making charitable contributions to reduce your tax liability or doing a Roth IRA conversion. But here's one more thing that should be top of mind if you have a 401(k).
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Don't leave any money on the table
The federal government requires you to make all 2023 401(k) contributions by Dec. 31, and this is also the deadline for those hoping to claim their 401(k) match for the year. If you fail to do so, you lose out on essentially free money.
Your match depends on your employer's 401(k) matching formula, as well as your salary. Typically, you earn either $1 or $0.50 for every $1 you contribute to your 401(k), up to a certain percentage of your income. This could easily amount to several thousand dollars for retirement.
If you earn $50,000 in 2023 and qualify for a dollar-for-dollar match up to 5% of your income, that's an extra $2,500 for you. And it could be worth a lot more in the future. If you earned a $2,500 match -- about $208 per month -- every year for 20 years, you'd wind up with over $118,000 just from your 401(k) matches alone, assuming you earned an 8% average annual rate of return. Note that you'd actually have at least twice that much set aside, since you have to contribute at least an equal amount of your own money to earn your match.
This is one of the simplest ways to increase your retirement preparedness. It might also help free up your budget. Let's say you hoped to contribute 15% of your income to your 401(k) each year. Without a match, you'd have to set aside all of that on your own. But if your company gives you a 5% match, you now only have to set aside 10% of your own money to reach your goal, giving you an additional 5% you can spend right now.
When you might not want to claim your 401(k) match
There are a few situations in which claiming your 401(k) match might not be your best move. The first is if you genuinely can't afford to do so because you need all your income to cover your bills. When you contribute to your 401(k), you're locking that money away. You typically can't withdraw it without penalty until you're at least 59 1/2, so it's not a good idea if you think you'll need it sooner.
In this case, you may want to forego your match altogether, or try to claim a portion of it instead of the whole thing. Think about what's feasible for your budget and don't push beyond that. You can always try again next year.
The other group that may not want to claim their 401(k) match are those who are new to their jobs and don't plan to stick around very long. Most companies have a vesting schedule that determines when you can keep employer-matched funds. If you leave the company before you're fully vested, you could forfeit some or all of your match.
There's nothing wrong with contributing to your 401(k) as long as you understand this and like your plan. But if it has costly fees or investment options you don't like, you may prefer to stash your savings in an IRA instead. IRAs give you more freedom to choose what you do with your savings, but you can only contribute $6,500 here in 2023 ($7,500 if 50+), compared to $22,500 with a 401(k) ($30,000 if 50+).
How to claim your full 401(k) match
To claim your full 401(k) match, you first need to understand how your company's matching formula works. Check with your company's HR department if you're not sure. You may also be able to view these details in your 401(k) account online if you have one of these.
Once you know how much you have to personally contribute to get your full match, compare this to the amount you've already set aside in your 401(k) for this year. For example, if your match is worth $2,500 and you've only set aside $2,000 so far, you'd need to set aside another $500 before the end of the year.
Then, divide this amount by the number of pay periods remaining in the year to figure out how much you must defer from each paycheck to reach your goal. Make sure you're setting aside at least this much already. If not, try to increase your contribution rate until the end of the year.
Again, it might not be possible for you to claim the entire match, especially if you haven't made any 401(k) contributions until now. That's OK. Just do the best you can. But when 2024 comes around, try to make claiming your match your top priority. If you begin making contributions to your account in January, you'll have a much better chance of claiming the whole match by the end of the year.
