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New Year's Resolution: Double Your Money (Legally)

Wouldn't it be great to start the New Year with a way to double your money? Especially if this technique is legal, quick and simple?

 

Wouldn't it be great to start the New Year with a way to double your money? Especially if this technique is legal, quick and simple?

This idea is no secret: it's called a corporate matching contribution.

Let's say that your boss comes to your office and gives you two choices:

a. Your company pays you an annual salary of $100,000, OR

b. Your company pays you an annual salary of $97,000, but it also deposits $6,000 into your retirement plan.

Which choice would you make?

If money is tight (especially if your salary is much less than this), you might find it very difficult to accept the lower salary. There are many, many people who are living on the edge, one paycheck away from disaster.

However, if you can accept a slightly lower salary, then the second choice makes much more sense. Your salary drops by $3,000, but your net worth increases by $6,000. You've just doubled your money!

To make the deal even sweeter, our tax code encourages you to choose the second option. Remember that your $100,000 salary is immediately taxed; you take home significantly less after Washington and California get paid. By contrast, the $6,000 deposited into your retirement plan will not be taxed until you withdraw it in the future, hopefully during retirement. And because your salary now drops to $97,000, your current income taxes are a little lower as well. There are only three requirements to make this work:

1. Your employer has to offer a retirement plan (such as a 401(k), 403(b), or 457) to its employees. According to the Bureau of Labor Statistics (2010), about 60% of companies offer these plans.

2. Your employer has to offer matching contributions. About half do; the median match is 3%.

3. You have to contribute to your retirement plan. This is the hard part that trips many people up. You have to be willing to forego the $3,000 (as in our example above).

Here are three ways to make this hard part easier:

1. Do you have any savings? (Credit card availability and home equity lines of credit do NOT count. I'm referring to a real account at a bank, mutual fund, or brokerage.) If so, here's a trick. If your salary shrinks by $3,000 (as in the above example), that means your take-home pay  drops by roughly $2,000 (because your company withholds for federal and state income taxes). Take $2,000 from your savings every year and use it to pay expenses. While your savings balance drops by $2,000, your retirement account balance increases by $6,000. Now you've tripled your money! (Tax caveat here: you will eventually be taxed on the $6,000 in your retirement account. But the key word here is "eventually.")

2. Will you receive a raise or bonus soon? If so, can you take this extra money and steer it all into your retirement plan? This way, your take-home pay remains unaffected.

3. Does your spouse or partner work for an employer with no retirement plan match? If so, (gently) suggest that it might be better for you to receive a corporate match instead. Hopefully, you will both benefit down the road!

There are very few free lunches in this world. Corporate matching contributions are one of them. Don't miss out on an easy way to double your money...legally!

 

Lou Dagen is a Certified Financial Planner in the San Francisco Bay Area. For 23 years, he has helped clients around the world retire in comfort, educate their children, and increase their net worth. If you have questions that you like answered in future blog posts, please comment below. Or call Lou directly at 925-997-8507.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Lou Dagen, CFP, ChFC January 13, 2013 at 04:52 AM
That reminds me of the old joke, "You can't eat relative returns." Thanks for pointing that out! --- Lou
Andrew Peceimer January 13, 2013 at 06:54 AM
Hey Lou, You did not mention that with a Defined Benefit retirement plan for public employees, such as the State of California or the city of Burlingame those employees are guaranteed their pension regardless of the investment's success. Additionally we the private sector have no control over those public employee investments but have to pay them if their investments go sour. Sounds awesome...they can gamble their retirement money and if they lose we in the private sector have to pay. Only in America!
Greg January 20, 2013 at 05:19 PM
You don't need an "extra $50K" to start. Many retirement plans can be started with as little as $25 out of your own pocket. Ask your employer's benefits people what is available.
Lou Dagen, CFP, ChFC January 20, 2013 at 07:10 PM
Greg, that's a great point! Chris, on Tuesday, why not call your Human Resources or Employee Benefits contacts and ask them for minimums? --- Lou
Brian Todd March 01, 2013 at 06:22 AM
Lou, I have not read through all the comments on here thoroughly, however I don't think anyone has yet to point out the biggest flaw to your original post: A 401(k) is not a great investment. Although, if an employer matches funds it essentially is "free" money that is not the whole story. The whole story goes something like this: free for now only to be taxed at a later date at a rate that is completely undetermined currently on an amount that is completely speculative (who knows if the amount you need/want will be there when you need it if it is tied to the stock market, which most 401(k)'s are) and oh yeah, you don't control the money or have free access to it. It is as close to a government retirement plan as there possibly could be. Stated another way: you are a farmer, you have the land and some seed. You have a few choices...you could get taxed on the seed at a particular rate, or you could get taxed on your harvest on a rate that you don't know. Which is the better deal?

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