The promise of free money is usually pretty enticing. After all, millions of people are rejoicing now that President Joe Biden has finally announced massive student debt relief.
So why are 1 in 10 working Americans missing out on thousands of free cash that is available right now and has been for a long time?
A 401(k) match from your employer is the closest thing many people have to free money, and studies show that millions are missing out.
That’s one reason the Securing a Strong Retirement Act of 2022 — also known as Secure Act 2.0 — passed the House by a landslide 414-5 vote in March. Among other things, the law would require most employers to automatically enroll workers in their pension plans.
However, it will be a year or more before this rule takes effect, and existing 401(k) plans will be exempt. Here’s how you can be proactive and get the money you’re owed now.
Millions don’t overdraft their 401(k).
A 401(k) match is a common program that sees your company match what you contribute to a workplace retirement account, up to a certain limit.
This perk is part of your compensation package when you get a job, so if you don’t take full advantage, it’s like missing out on part of your salary.
Let’s say you make $60,000 a year and your employer offers a dollar-for-dollar match of up to 6% of your salary. This means the maximum your employer will give you is $3,600 each year.
But if you only put $2,000 into your 401(k), your employer only puts in $2,000 — and you’re leaving $1,600 on the table.
Opportunities like these don’t come around often in life, and yet 17.5 million Americans are guilty of not cashing in on the full offer they receive, according to a MagnifyMoney survey.
How will Secure Act 2.0 change things?
It’s not that retirement saving isn’t important to Americans, with 71% of people naming “living comfortably in retirement” as a top life goal in a 2022 Principal Financial Group survey.
However, about half of Americans aren’t sure their savings are enough or lack confidence in their retirement planning.
Under Secure Act 2.0, employees will be automatically enrolled in a 401(k) with a contribution rate of 3% of their pay. Assuming you don’t opt out, the contribution rate will increase by 1% per year until it reaches 10-15%.
The legislation will also expand what you can do with your 401(k) contributions, and many employers are buying.
A survey of more than 360 employers by business consultancy WTW found that 38% plan to allow employees to divert their contributions to things like reducing student loan debt, adding to emergency savings or topping up a savings account health — all while still receiving a corporate match on those amounts.
About 28% of employers surveyed also plan to beef up their plans by doing things like increasing the amount of the automatic deferral.
Why don’t people contribute more?
Principal research says 62% of workers cite employer matching contributions as a top criteria for meeting retirement goals.
However, when it comes to knowing about and contributing to 401k plans, the MagnifyMoney survey shows that a small number of respondents say they don’t understand how 401(k) retirement plans work (6%) or don’t know if their company offers a match (17%).
Some workers (12%) say they want to wait until they are older to contribute. But as any financial expert will tell you, contributing as soon as possible is critical, as it gives your investments more time to grow.
The biggest reason workers aren’t taking full advantage is affordability. over a third of MagnifyMoney survey respondents say they simply can’t contribute as much as they’d like. This makes sense, especially at a time when many families’ budgets are stretched to the breaking point.
How to start taking full advantage
When there’s that much money on the line, you’ll want to set up a conversation with your HR representative right away.
Prioritizing your 401(k) over other savings and investment options is often a smart move, at least until you’ve maxed out your company match.
An exception could be building your emergency fund — in the event of a crisis, withdrawing money from your 401(k) early can trigger costly penalties.
If you have enough money to spare, your first step should be to set up automatic withdrawals from your paycheck. A “set it and forget it” approach will get you maximum matching.
Please note that the new legislation means that you could have many choices about what to do with your contributions in the future.
Remember that you can always invest more than the amount your employer will cover. And since these automatic withdrawals usually come from your pre-tax income, you won’t have to pay taxes on your contributions.
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This article provides information only and should not be construed as advice. Provided without warranty of any kind.