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Fundamentals of FI: 401k Match

In the realm of financial independence, one of the most accessible and often overlooked opportunities lies within the 401k match. It is essentially free money provided by employers to incentivize employees to save for retirement.

Let’s delve deeper into the concept of 401k match and explore how it can be a powerful tool for individuals to supercharge their savings and secure their financial future.

Understanding the 401k Match

A 401k is a retirement savings plan offered by companies, allowing employees to set aside a portion of their salary for retirement. The 401k match refers to the contribution made by the employer, which serves as an added benefit on top of the employee’s salary. While companies may not explicitly highlight this match as part of the salary package, it is crucial for individuals to recognize and take advantage of this opportunity.

Maximizing the Benefits

Most 401k matches follow a specific structure. For instance, a common arrangement is where the employer matches the first 3% of the employee’s salary contributed to the 401k. This means that if an employee sets aside 3% of their gross salary, the employer will also contribute an equal amount, resulting in a total of 6% being saved for retirement. In essence, the employee is receiving an additional 3% of their salary as free money.

Tax Advantages

Another advantage of the 401k match is its tax-deferred nature. When contributing to a regular 401k, the amount set aside is not subject to immediate taxation. This means that individuals can reduce their taxable income for the current year, resulting in potential tax savings. Consequently, the impact on an employee’s take-home pay is less than the actual percentage being contributed, further enhancing the value of the 401k match.

Different Match Structures

While the example Brad talks about in the video features a 3% match, it is essential to note that match structures can vary. Some companies may offer a 50% match on the first 6% of contributions, effectively providing an additional 3% of the employee’s salary. In this scenario, an employee contributing 6% would receive a total of 9% in their 401k, with the employer’s contribution accounting for half of the increase.

Harnessing the Power of Free Money

The concept of recognizing 401k match as free money cannot be overstated. By taking advantage of this benefit, individuals can significantly boost their retirement savings without incurring additional costs. Failing to capitalize on this opportunity could be seen as a missed chance to secure one’s financial future.

The Bottom Line

The 401k match represents a valuable source of free money for individuals on the journey to financial independence. By contributing to their 401k, employees can benefit from their employer’s matching contributions, effectively increasing their retirement savings without any additional expense. Understanding the intricacies of the match structure and its tax advantages is crucial in harnessing the full potential of this benefit. By recognizing the 401k match as the free money it truly is, individuals can take a significant step towards securing their financial well-being in the long run

Video Transcript

“One of the easiest Financial Independence fundamentals to take advantage of is your 401k match. 

Now, if this is a term that you don’t know anything about and you’ve never heard it before: If you are at a company that offers a 401k, which is basically where you can put money, aside from your paycheck, to save for retirement. So, most companies offer what’s known as a 401k match. So, in essence, this is actually part of your salary that your company is giving you for free to incentivize you to save for your retirement. 

Okay, but they don’t use those terms, right? They don’t say “Hey, this is part of your salary, you’ve got to do this.” They just kind of offer this in the background and they’re not as overt about it as they really should be. But when you hear “This is part of my salary,” you think: “Hey, I’m being kind of stupid for letting this pass by right?” 

So first, you’ll have to look at your 401K plan. Or just ask your HR department. “Hey, how does the match work on our 401K?” But most of them work something like this. It’ll be “Hey, we will match the first 3% of your salary that you put aside in your 401k.” Okay. So how that would work is every pay period, 3% of your gross salary would go into your 401k that your employee deferral. Right? That’s the amount you put aside and the employer match in this hypothetical case would be an equal amount. So that is completely free money. You are getting in that case, 6% of your salary, put away into your 401k. 

You know, it’s only costing you 3%. And the nice thing is with the regular 401K, this is actually a tax-deferred amount. So, you are not paying taxes on that in the current year. So, it actually will feel like less than 3% coming out of your paycheck, which is just a nice extra bonus. You’re getting 6% put aside for you and it’s only costing you let’s say 2% out of pocket is what it will feel like, you know, plus or minus. 

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