How supersavers cheat themselves out of 401(k) matches

The Consequences of Supersavers Missing out on 401(k) Matches

Saving for retirement is an important financial goal for many Americans, and one of the most common ways to do so is through a 401(k) plan offered by an employer. These plans allow employees to contribute a portion of their salary on a tax-deferred basis, with many companies offering a match on contributions up to a certain percentage. However, some employees may unintentionally cheat themselves out of these matching funds by exceeding the annual contribution limit set by the IRS.

Known as “supersavers,” these individuals contribute the maximum allowed amount to their 401(k) accounts each year, often without realizing that they are missing out on potential employer matches. The annual limit for 401(k) contributions in 2021 is $19,500, with an additional $6,500 allowed for those over the age of 50. While it’s great to save aggressively for retirement, exceeding this limit can mean leaving money on the table in the form of employer matching contributions.

For example, let’s say an employee earns $100,000 per year and their company offers a 50% match on up to 6% of their salary. If the employee contributes the maximum of $19,500 to their 401(k) account, they would miss out on $3,000 in matching funds (6% of $100,000). In this scenario, the employee would be cheating themselves out of free money that could significantly boost their retirement savings over time.

To avoid this costly mistake, supersavers should be mindful of their 401(k) contribution limits and adjust their contributions accordingly. Most financial experts recommend contributing enough to receive the full employer match before maxing out contributions to the annual limit. This way, employees can maximize their retirement savings while also taking advantage of valuable matching funds from their employer.

In addition to missing out on matching contributions, exceeding the annual 401(k) contribution limit can also result in tax penalties from the IRS. Contributions that exceed the limit are considered excess deferrals and must be corrected by the individual, typically by withdrawing the excess amount and paying taxes on the associated earnings.

Ultimately, supersavers should strive to strike a balance between saving aggressively for retirement and maximizing employer matching contributions. By staying informed about 401(k) contribution limits and taking full advantage of employer matches, employees can ensure they are on track to meet their long-term financial goals without cheating themselves out of valuable benefits.
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