Have you ever seen one of those funny videos where someone stands on a street corner and tries to hand out $10 bills? Many people refuse the money and keep walking. But what if I told you there is a way to get far more than $10 in free money—$332,307, actually—and it is perfectly legal. Most folks would say I’m crazy.
In another article I recently cited some disheartening statistics from a 2013 Employee Benefit Research Institute study:

  • One of the primary vehicles for retirement savings is an employer-sponsored retirement savings plan, like a 401(k). Eighty-two percent of eligible workers say they participate in such a plan, and another 8% of eligible workers report they have money in such a plan, although they are not currently contributing.
  • Cost of living and day-to-day expenses are the leading reasons why workers don’t contribute (or contribute more) to their employer's plan, with 41% of eligible workers citing these factors.

The report also said that only 10% of those working are contributing the legal maximum to their plan. The maximum annual contribution for a 401(k) is $17,500 ($23,000 if you are over 50). For a SIMPLE 401(k), the limit is $12,000 ($14,500 over 50). Also, many employers will match all or part of an employee's contribution.
I spoke with my CPA, David Kinard, about the limits; he told me about a large company in Atlanta that matches 100% of an employee's contribution up to 6% of their total salary and 50% of the next 2%, up to a maximum of 7% of the employee's salary, which is fairly typical.
To keep the math simple, consider a hypothetical employee, Bob Jones. Bob is 48 and makes $100,000 per year. Should Bob elect to put $6,000 in his 401(k), his employer matches it. Then it would also match 50% of the next 2%, up to 7% of Bob's total salary. In other words, should Bob decide to put $8,000 into his 401(k), the company will contribute $7,000. Right from the start, Bob has earned 87.5% on his money.
The money that Bob contributes to his plan is tax deferred, meaning that his taxable income is reduced by that amount in the year he made the contribution. If Bob is in the 25% marginal tax bracket, he will reduce his current-year tax bill by 25% of the $8,000 he contributed. Of the $8,000 Bob contributes, he saves $2,000 in taxes; and his employer deposits an additional $7,000 into his account.
Free Money
Imagine that Bob Jones just joined a new company and anticipates working there until he is 68. To be conservative, assume he will receive an average 2% cost of living raise annually. In addition, let's assume that the government will increase the maximum contribution at the same 2% rate each year. Bob's 401(k) is conservatively invested and earns an average of 4%. And since it's his salary that gets the match, let's assume he's filing separately in the 28% tax bracket.
I turned to Vedran Vuk, our senior research analyst, to answer a couple of questions about Bob. Over the next 20 years, how much would Bob accumulate if he just contributed 8% of his salary with his employer-matching deal? What if Bob contributed the maximum amount each year?

If Bob just contributes 8% of his salary, he will get an additional $539,459 at the end of 20 years. But most important, $332,307 will come from matching, tax savings, and interest earned on matching funds and tax savings. If Bob contributes the maximum, he accumulates an additional $790,220. It is free money.
So why would his company do this? It should come as no surprise that employers receive federal tax benefits for matching funds. But regardless of their motives, it is there for the taking.
If you're not maximizing your contributions, you might want to check with your personnel department. You might just find extra money waiting for you.
And be sure to check out our upcoming online feature, "America's Broken Promise: Strategies for a Retirement Worth Living", featuring John Stossel from Fox Business Network, David Walker, former US Comptroller General and trustee for Social Security and Medicare. They'll be joined by Jeff White, president of American Financial Group, and me, Dennis Miller, senior editor of Money Forever.
This event premieres on September 5th. Click here to learn more and reserve your space.  

Related Articles
  1. Retirement

    Moving Retirement Plan Assets: How To Avoid Mistakes

    Sometimes things go wrong in a simple transfer of funds. Make sure you know how to avoid penalties.
  2. Taxes

    The Basics Of A 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Find out why.
  3. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Here are some tips for retirement goals, general investing rules and what to focus on while saving.
  4. Retirement

    Introduction To SIMPLE 401(k) Plans

    Learn about the features and benefits of the plan that is a cross between a SIMPLE IRA and a traditional 401(k) plan.
  5. Options & Futures

    401(k) Debit Cards: Taking A Swipe At Your Retirement Savings

    This is just another more convenient way to borrow from your plan. But at what cost?
  6. Taxes

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
  7. Mutual Funds & ETFs

    Top 3 UBS Global Funds for Retirement Diversification in 2016

    Learn about UBS's asset management business, past mutual fund performance and the top three UBS mutual funds to consider for retirement diversification.
  8. Retirement

    Ten Social Security Questions Everyone Asks

    The average American doesn’t know enough about Social Security. Here are answers to 10 of the more common questions people ask about our retirement system.
  9. Mutual Funds & ETFs

    Invesco’s Top Funds for Retirement

    Here's a list of Invesco investments—retirement funds—that may work for you if you have the time to let them mature over the long term.
  10. Mutual Funds & ETFs

    Top 4 Royce Funds for Retirement Diversification in 2016

    Discover four of The Royce Funds mutual funds suitable for diversifying retirement portfolios that focus on investing in small-cap companies.
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. However, ... Read Full Answer >>
  3. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  4. What's the difference between Social Security Disability Insurance (SSDI) and Supplemental ...

    Disabled persons can receive payments through two programs: Social Security Disability Insurance and Supplemental Security ... Read Full Answer >>
  5. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  6. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
Trading Center