Unbeatable way of doubling your wealth
July 25, 2009
The certain champ of doubling your money is that matching contribution you receive in your employer's defined contribution retirement plan.
In the defined contribution plan, you and your employer contribute money to your individual account in the plan. In many cases, you are responsible for choosing how these contributions are invested, and deciding how much to contribute from your paycheck deductions. Your employer adds to your account by matching a certain percentage of your contributions. The value of your account depends on how much is contributed and how well the investments perform. At retirement, you receive the balance in your account, reflecting the contributions, investment gains or losses, and any fees charged against your account. The 401(k) plan is a popular type of defined contribution plan.
Generally, the employer's contribution may match the employee's elective deferral contribution up to a certain dollar amount or percentage of compensation. Getting automatic 50 cents to $1 free money for every dollar you deposit is unbeatable.
Making it even better is the fact that the money going into your 401(k) or other employer-sponsored retirement plan comes from your paycheck through pretax deductions, that is right off the top of your taxable payroll reported to the tax agency, IRS. For most Americans with tax brackets between 25% and 35%, that means that each dollar invested really only costs them 65-75 cents out of their pockets. In other words, for every 75 cents, most Americans are willing to forgo out of their paychecks, they'll have $1.50 added to their retirement nest egg with an employer’s matching contribution of 50%.
The government also indirectly matches some portion of the retirement contributions of taxpayers earning less than a certain amount. The Credit for Qualified Retirement Savings Contribution reduces your tax bill by 10-50% of what ever you contribute to a variety of retirement accounts (from 401(k)s to Roth IRAs).