It amazes me how many employees fail to take advantage their company’s retirement plan match. So what’s the explanation? Money is tight? Can’t afford to save? Poor investment options? Those are all common concerns and realities many investors face today, but they are hardly an excuse. Hopefully with some additional knowledge and understanding, you can avoid the financial misstep of turning away valuable retirement savings compliments of your employer.
What makes a Simple IRA match so beneficial and unique?
Companies may administer a Simple IRA match in two ways:
- Dollar-for-dollar matching contributions (not to exceed 3% of the employee's compensation) on behalf of eligible employees who make elective-deferral contributions
- A 2% non-elective contribution to all eligible employees, regardless of whether they make deferral contributions.
In either option, employer contributions made on behalf of employee are 100% vested. Meaning they are all yours from day one! In my experience, most employers opt for a dollar-for-dollar matching formula, which in turn, forces employees to enroll and defer 3% of their income to reap the rewards of the company match.
As an example, let’s assume an employer chooses a 3% dollar-for-dollar matching contribution. This means an employee making $30,000 per year, deferring 3% of income, will have saved $900 into their Simple IRA plan. As a result, the employer will contribute an additional $900 matching contribution. Fail to enroll and defer 3% of your salary and you’ll receive ZERO benefit.
It’s difficult to find a scenario where it does not make sense to contribute the minimum 3% into the Simple IRA. Even if you cannot afford to save, in the worst-case scenario, you could turn around and withdrawal your contribution and company match. Yes, you’ll be forced to pay income tax and stiff early distribution penalties, but you’ll be paying it with company dollars.
A Simple IRA carries harsh penalties for certain distributions that occur within the initial two-year plan period. Distributions that occur during your plan’s initial two-year period are subject to an early-distribution penalty of 25% if you are under age 59.5 when the distribution occurs. However there are exceptions to the rule, such as, if the funds go to pay medical expenses, college cost or a first time home purchase. As always, you should consult your plan provider and tax professional before taking a distribution.
Balancing today’s financial demands with future retirement needs will always be a challenge. At the end of the day, you will be hard-pressed to find a perfect time to invest, unless of course your company is providing a Simple IRA match!
Troy Wyman, CFP ® is a Financial Planner at Center for Financial Planning, Inc. Active in the community and his profession, Troy serves as President Elect on the Financial Planning Association (FPA®) Michigan board and Executive Committee member on the Birmingham Bloomfield Chamber board. In addition to his contributions to Money Centered and Center Connections, Troy was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine.
Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.
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