How the match is worded
Match formulas invite misreading. A match of fifty percent of the first six percent means that if you contribute six percent of your pay, the employer adds three, and if you contribute only three, you receive one and a half. On a $50,000 salary, the first formula is worth $1,500 a year in exchange for your $3,000. Many plans enroll new employees automatically at around three percent, which can fall short of the full match, so check your rate in the plan portal during your first week.
Traditional or Roth
Most plans now offer both. Traditional contributions come out before income tax, and withdrawals in retirement are taxed as income. Roth contributions are taxed now and come out tax-free in retirement, growth included. If you are early in your career and in a low bracket, Roth is often the better bet. The annual contribution limit, which the IRS adjusts most years and publishes on its website, applies to the two combined, and the employer match does not count against it.
Vesting, fees and funds
Your own contributions are always yours. The employer's contributions may vest over time: under a cliff schedule you own none until a set date, at most three years out, and under a graded schedule ownership builds over as long as six. Check the schedule before you resign a month short of a vesting date. Then look at each fund's expense ratio. An index-based target-date fund should cost well under half a percent a year, and anything around one percent deserves suspicion. A common default is the target-date fund nearest the year you turn sixty-five, held alone, because it is built to be a complete portfolio.
When you change jobs
- You can usually leave the money in the old plan or roll it into your new employer's plan.
- You can roll it into an IRA, which gives you the widest choice of investments.
- You can cash it out, which in most cases triggers income tax plus a ten percent penalty before age fifty-nine and a half.
Ask for a direct rollover, in which the money moves from institution to institution. If a check is made out to you personally, the plan withholds twenty percent for tax, and you have sixty days to deposit the full amount or the shortfall counts as a withdrawal.
Tip Raise your contribution by one percentage point every time you get a raise, because you will not miss money you never saw. A common goal is fifteen percent of pay, match included.
