How Much Should I Take Out For 401K?

401k plans are retirement plans sponsored by an employer for the employees benefit. The employer pays all administrative fees and takes the employee’s contribution directly from their earnings.

How Much Should I Take Out For 401K?

There are two facts an employee needs to consider before they decide how much they should take out for 401k plan contributions. First, if s/he does not already have one, a budget needs to be established. This is simply a list of monthly income and expenses. The difference between the income and expenses is discretionary income. Money that is not needed for food, clothing, mortgage, medical and other expenses is available for savings such as 401k contributions. The next fact to consider is if the employer offers a company match.

What Is A Company Match?

One feature that both employers and employees value is a company matching contribution on an employees deposit. The plan sponsor deposits funds into an employees account to match the employees contribution. It will usually be a percentage of the employees contribution. For example, the company match is 50%. Employee contributes 6% monthly, employer contributes 3% monthly. Employees love this feature because it is as close as anyone can get to free money. Employers use the company match as “golden handcuffs.” Usually the plan sponsor will require a certain time period before the employee is vested in the company match. Vested means the employee actually owns the company match funds. The vesting period is usually 3 to 5 years. If the employee leaves before the matching funds are vested, these funds are forfeited by the employee and stay in the plan. This encourages workers to stay with the employer to get the company match. Employers are benefited by a lower turnover rate, which lowers hiring and training new employee expenses.

Related posts

1. What Does Vested In 401K Mean?
2. What Is a 401k Retirement Plan?
3. Are All 401K Plans Created Equal?
4. How Much Can I Put In My 401K?
5. What Is 401K Forfeiture?

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