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  • Writer's pictureKelsey

Raise Your Hand if You’d like FREE Money

*All hands in the room raise*

Most employers offer their employees retirement plans and offer a match in contribution, meaning we get free money when we contribute ourselves. The most common is a 401(k) Plan, a 403(b), and a 457.

These plans operate very similarly - the distinction is who offers them. A 401(k) plan is offered by for-profit organizations, a 403(b) offered by non-profit organizations, and a 457 is for state and local government employees.

Employer matches vary by company and all require us the employee to first enroll in the plan and contribute to the plan before they will contribute. Some employers automatically enroll employees upon hire, but many require the employee to take the initiation to enroll.

This benefit we should always enroll in and our minimum contribution should always be the maximum the employer matches.

Contributions are based on income, so if we make $50,000 and our employer will match 3% of our contribution, we set up a 3% contribution ourselves to maximize the employer match (if we set up only 2%, even though the employer can put in up to 3%, they will only go as high as we are contributing). Being paid biweekly equals $57 from each paycheck going into our retirement account, and our employer will put $57 in as well. At the end of the year, we will have contributed $1,500, and our employer contributed $1,500, for a total of $3,000!

Now you are likely thinking there has to be a catch. And yes, there is a catch.

In return for contributing to an employee’s retirement, our company wants us to remain an employee with them. Employers implement Vesting Schedules that determine how many years we must work to own a percentage of the employer's contribution.

Note: the money we put in is always 100% ours. The money our employer contributes is earned by our loyalty as an employee through continued employment.

Typical Vesting Schedules can be up to 3, 4, or (no more than) 5 years.

Using our example above, if our employer has a 4-year vesting schedule, we get 25% of their contributions for each full year we work.

For simplicity, let’s keep the annual $1,500 contribution and assume no gains

· End of Year 1: Employer has contributed $1,500, we get 25% = $375

· End of Year 2: Employer has contributed $3,000 ($1,500 last year,$ 1,500 this year), we get 50% = $1,500

· End of Year 3: Employer has contributed $4,500, we get 75% = $3,375

· End of Year 4: Fully vested, we get 100% of the $6000 our employer has contributed

Note: Our account balance in years one-four will be misleading; we will see the full employer contribution in our account, but if we leave before we fully vest, we would have to forfeit that percentage not vested and they will remove it from our account.

It pays to remain an employee at our current company until we are fully vested; however, better opportunities may warrant leaving and losing part of the contribution if we are getting a higher income elsewhere.

The main action - make sure we're signed up for our employer's retirement plan (and getting that match!)



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