The 401K: Take The Free Money

401(k) Plans: If You’re Not Taking the Free Money, What Are You Even Doing?

Alright, let’s cut straight to the chase: 401ks were an accident of obscure federal policy. But now we're stuck with them. And if you’ve got a 401(k) plan at work, and especially if your employer is throwing in a match on your contributions, I’ve got one question for you: why aren’t you all over that? We’re talking about free money here, people—cash that your company is basically handing to you, no strings attached. It’s like an airline bumping you up to first class for free, and you saying, “Nah, I’ll stick to coach.” Absurd, right? Yeah, that’s what I thought. So, buckle up, because we’re diving into why the 401(k) is your not-so-secret weapon to getting a fat retirement fund, and how not taking advantage of it—especially the match—is like leaving piles of money on the table. And that, my friends, is not the Tad Bougie way.

What’s a 401(k) and Why Should You Care?

First things first. A 401(k) is a retirement savings plan sponsored by your employer. You contribute pre-tax dollars, which means you’re lowering your taxable income in the process (nice little bonus, right?). That money gets invested into a selection of funds, which, depending on how you play it, could range from low-risk bonds to high-octane stock funds. Over time, those investments grow tax-deferred—so you’re not paying a dime in taxes on those gains until you retire and start pulling the money out. This is how the rich stay rich, people. Let that money marinate while Uncle Sam waits in the wings. But here’s the real kicker: the employer match. If your company offers it, they’re saying, “For every dollar you put in, we’ll toss in some of our own.” Common matches look something like 50% of what you contribute, up to a certain percentage of your salary—often 3% to 6%. So, if you’re earning $100K a year, and your company’s matching 50% of the first 6% you contribute, that’s $3,000 in free money. Free. Money.

Why Not Contribute Is the Real Question

Look, I get it. Retirement can feel like a distant concept, and maybe you’re more focused on saving for that next trip to the Maldives than stacking cash for your golden years. But here’s the deal: you don’t have to choose. You can have your luxury getaway now and a cushy retirement later. And the way to do that is to not be foolish when someone hands you free money—like the money your employer is offering to match in your 401(k). If your company’s matching contributions, that’s a guaranteed return on your investment. Think about that. Guaranteed. You’d be lucky to find an investment that gives you a 50% return right out the gate. So if you’re not at least contributing enough to get the full match, you’re passing up on the easiest win in the game. It’s like not swiping your rewards credit card on a huge purchase and missing out on all the points—amateur hour.

How Much Should You Be Contributing?

Let’s get practical. The bare minimum is this: contribute enough to get the full company match. If your employer matches 50% of your contributions up to 6% of your salary, you need to be putting in that 6%. Not 3%, not 5%, but the full 6%—whatever the max is to squeeze every last drop of free money. Once you’ve locked in that match, the next step is to consider maxing out your 401(k) contributions. In 2024, you can sock away up to $23,000 per year if you’re under 50. If you’re 50 or older, you can throw in an additional $7,500 as a “catch-up” contribution, bringing your total to $30,500. That’s a ton of tax-deferred goodness, people. Now, I get it, not everyone can afford to max out their 401(k) right now. But aim high. Even if you’re not maxing out today, work toward increasing your contributions little by little each year. It’s like working your way from economy to premium economy to business class—step by step, you’ll get there.

The Power of Compound Growth

Here’s why starting early with your 401(k) is such a game-changer: compound growth. This is where your money starts earning money, and then that money earns more money. It’s like getting points on your points—stacking up until you’ve got enough to fly first class across the globe. Let’s say you’re 30 years old and you contribute just $10,000 a year to your 401(k), with a 7% annual return. By the time you’re 65, you’ll have over $1.4 million sitting in that account. And that doesn’t even factor in employer matches, which could add tens of thousands more to the total. That’s how wealth is built—slowly, steadily, and with compound interest doing the heavy lifting. So, if you’re not contributing to your 401(k), not only are you missing the match, but you’re also letting the power of compounding slip through your fingers.

Tax Benefits: The Cherry on Top

Contributing to a 401(k) lowers your taxable income. That means if you’re making $100K and you contribute $19,000, the IRS only taxes you on $81,000. It’s like getting an extra deduction just for doing something you should be doing anyway. And those investments? They grow tax-deferred, which means the IRS can’t touch those earnings until you retire and start pulling the money out. Yeah, you’ll eventually pay taxes when you withdraw the money in retirement, but by then, the plan is that you’ll be in a lower tax bracket (since you won’t be working full-time). So, you’re getting a nice little tax break when you need it most—right now.

One Last Note on Vesting

Now, before you go all in on that employer match, make sure you understand your company’s vesting schedule. Vesting is how long you have to stay with the company before their contributions (the match) fully belong to you. Your contributions? They’re always yours. But the company match might have a vesting schedule, like three years or five years. If you leave before you’re fully vested, you might forfeit some of those matching funds. So, it’s like earning bonus points that you can’t fully redeem until you’ve stuck around long enough. Keep an eye on that vesting schedule and plan accordingly.

In Summary: Take the Free Money

If there’s one takeaway here, it’s this: don’t pass up free money. Contribute enough to your 401(k) to get the full match, because leaving that on the table is like skipping the complimentary upgrade at your favorite hotel. And once you’ve got the match locked in, try to push your contributions higher over time, especially if your salary increases. The 401(k) is one of the best retirement tools out there, and the match is the ultimate no-brainer. You’re not just setting yourself up for the future—you’re making sure that future is filled with the same kind of luxury you love experiencing today.