One 401(k) Mistake I Wouldn’t Be Caught Dead Making

A 401(k) is a great retirement savings tool, but you have to know how to use it to get the most out of it. With so many rules surrounding these accounts, it's easy to make costly mistakes if you're not careful. There's one mistake in particular you want to avoid at all costs if you're trying to maximize your savings.

Don't leave any money on the table

You'll probably end up paying for the bulk of your retirement expenses on your own, but if you qualify for a 401(k) match, you may get some help from your employer. As long as you contribute to your 401(k), your employer will also put some cash aside for your future. But this is a limited-time offer.

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Once the year is over, your chance to claim your 401(k) match for that year is gone. If you skip your 401(k) contributions, you're essentially giving up a bonus — one that could be worth a few thousand dollars.

Every company has its own 401(k) matching formula, so talk to your HR department to learn how yours works. One common approach is to do a dollar-for-dollar match on 3% of your income or a $0.50-on-the-dollar match on 6% of your income.

So if you earned $50,000 this year, that means you'd contribute either $1,500 or $3,000 of your own money and your employer would add another $1,500 on your behalf. And every year you work there, you have a chance to earn another $1,500 match — or even more if you get a raise in the future.

If you consistently earned a $1,500 match over 20 years and that money earned an 8% average annual rate of return, your matches alone would be worth over $71,500. And that's not including any of your personal contributions. If you contributed $1,500 of your own money per year, you'd have twice as much by the end of 20 years.

But just because it's in your account doesn't mean it's yours

You should definitely try to claim a 401(k) match if you qualify for one, but you usually can't just take the money and run. Most 401(k)s have a vesting schedule that determines when your 401(k) match actually belongs to you.

Some companies have what's known as a cliff vesting schedule. This says you must work for the company for a set number of years before you're allowed to keep any of your employer-matched funds if you quit your job.

Others use a graded vesting schedule, where your 401(k) match is released to you gradually over time. You might get to keep 25% of your match if you leave the job after one year, 50% after two years, and so on.

Once you're fully vested, you can take all employer-matched funds once you leave the company. If you're not sure whether you're fully vested already, it's a good idea to check with your HR department. Those who aren't may want to stick with their job for a while longer so they don't forfeit some of their retirement savings.

How to claim your full 401(k) match

Claiming your 401(k) match is pretty straightforward: Just contribute money to your 401(k). You can either choose a dollar amount or a percentage of your paycheck, and you can change your contribution amount at any time.

Make sure you know what your maximum match is so you know how much to contribute this year. Put all your retirement savings here first until you've claimed the full match. Then you can switch to another retirement account, like a Roth IRA, if you prefer.

If you're not sure you can afford 401(k) contributions, comb your budget to see if you can free up any more cash. Or you could start a side hustle. You won't be able to contribute your side hustle funds directly to your 401(k), but you can use this money to help you pay for your basic expenses so you can afford to set aside a larger portion of each paycheck from your job.

Even if you do all that, it may not be possible for you to claim your full match. But you should always claim as much as you can. Every little bit helps when saving for retirement, and if you pass up your match this year, that money is gone forever.

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