If your company offers a 401(k) or 403(b) retirement savings plan and offers to kick in some of its own money, you're nuts to pass it up. That company match is free money. It kills me when people tell me they are eligible for a plan with a match but don't invest. It's as though your boss has asked you, "Would you like an annual bonus?" and you've answered, "No, thanks!"

The way these plans work is that if you agree to invest a portion of your paycheck in the 401(k), many employers will match a part of your contribution. The money your employer will contribute varies; often your company will give you 50 cents for every dollar you invest, up to a maximum of 6 percent of your salary. The only caveat: Typically, the amount your employer puts in isn't 100 percent yours for three or four years. Should you leave the company before then, you will not be entitled to take the full match with you, though all your contributions are yours to take. So if you plan on job hopping, you're better off investing in a Roth IRA. But if you do intend to stay, I advise you to think of your 401(k) as an automatic return on your money. And you're guaranteed to get it every year. When was the last time anyone guaranteed you a bonus?

That's why I advised the 55-year-old woman who asked about getting her finances in shape to make investing in her employer's plan—if it comes with a match—her top financial priority. It's more important than paying down high-rate credit card debt or starting an emergency savings account. (Conversely, since the woman in the military doesn't get a match, I suggested she suspend her retirement contributions to focus on other goals.)

And one last point that seems especially timely given that our taxes are due this month: Money invested in your 401(k) is pretax. That means Uncle Sam doesn't take a cut up front and your funds grow, tax-deferred, for years. Even better, the amount of your contribution reduces your taxable income, and that will lower your overall tax bill.


Next Story