Lots of defined contribution plans come with a bonus: a matching contribution from your company. The match can often be 50 cents to a dollar for every dollar you contribute, up to a set maximum – perhaps 3% to 6% of your salary, or in some cases a dollar limit. Let’s say you’re contributing 6% of your $50,000 salary to your 401(k), and your company matches 50 cents to a dollar up to that 6%. That means you’ll be putting $6,000 from your paycheck, and your company will kick in another $3,000—effectively giving you a $3,000 annual raise!
Best of all, that virtual raise won’t increase your tax bill, since you pay no taxes on matching contributions until you withdraw them in retirement.
The employer’s match money typically “vests” over three or four years, meaning you have to keep working for the company for that amount of time before all the matching funds are yours to keep.
Many employers’ matches come in the form of company stock – and free company stock is a heck of a lot better than nothing. However, in order to limit your risk, it’s wise to move out of the stock and into more diversified investments as soon as possible. Experts recommend keeping no more than 5% to 10% of your total assets in the stock of your company. Just ask any former employee of Enron or Bear Stearns why that advice makes sense.
Consult your benefits administrator to find out your plan’s rules for moving out of company stock.