The retirement savings programs known as 401(k)s offer employees the ability to get free money if they take advantage of their employer’s matching program. The 2008 recession resulted in many businesses ending their matching programs to save on costs. By late 2009, those same businesses started reinstating them as the economy slowly improved. Today, 401(k) matching programs are reduced from their former stature, but they are still available for employees. Through mistakes, however, the benefits of matching are lost. Two common mistakes are not making the full contribution amount and failing to contribute any catch-up amounts.
Many employees simply do not contribute to their 401(k) plans, which is a serious mistake. Making contributions is how an employee can take advantage of the matching program in the first place. The specific details of how to make a contribution depends on the employer. Usually, the employee withholds an amount from his monthly paycheck. If he does not withhold the full amount allowed by his employer, he is definitely missing out on matching benefits.
According to the IRS, the maximum contribution amount an employee can make to a 401(k) is $17,000, which is higher than the $16,500 limit for 2011. Individuals over 50 years of age can make catch-up contributions of no more than $5,500. This was not raised for the 2012 tax year.
The employer typically matches up to 50 percent of all contributions, including both regular contributions and catch-up contributions. Over time, the loss from contributing less than the full allowable amount can be substantial. For instance, an employee contributing two percent out of a possible four percent and an employee contributing the full four percent experience very divergent futures. The difference in terms of returns generated can be enough to put the same employees in two different tax brackets by the time they retire.
Employees can also accidentally shoot themselves in the foot by making their contributions over short periods of time. They can actually lower the total amount of matched funds provided by an employer. Some companies calculate what the total matched amount would be under different scenarios. They pay the employee the difference if he has a lower balance than the calculated amount through different contribution schedules.