In today’s economy, a lot of employers have had to cut costs on some of the benefits they provide for employees, such as the employer match on 401(k) accounts. Here’s everything one needs to know about the 401(k) contribution limits and employer match scheme, as well as the options available for investors if their employer stops matching it.
In this article:
- 401(k) Annual Contribution Limits
- 401(k) Employer Match Limits
- Options for Maximizing Your 401(k) Employer Match
- Challenges of Transferring Money To a New Plan
- Rollover IRA
401(k) Employer Match | What to Do When the Employer Stops Contributing
What is the Employer Match Scheme? An employer match scheme refers to an employee benefit where the employer matches a percentage of the amount an employee contributes to their 401(k).
401(k) Annual Contribution Limits
Here are the 401(k) annual contribution limits for 2019. Note that employer contributions aren’t included in these limits and these just apply to the employee’s contributions.
- Younger than 50 years old — $19,000
- 50 years and older — $25,000
Employees who want to get a general idea of how to compute to maximize their employer match contributions can check out 401(k) employer match calculators online. Additionally, they can check with Payroll or Human Resources to learn more about their employer match program.
401(k) Employer Match Limits
For 2019, the IRS annual limit for a 401(k) is $56,000, or 100% compensation, depending on which amount is lower. How does this work with the employer match 401(k) scheme?
- An employee can contribute as much as the annual contribution limits yearly.
- The employer may contribute to the employee’s 401(k) through the employer match scheme or via additional compensation up to the IRS annual limit.
Options for Maximizing Your 401(k) Employer Match
Employees who want to find out how they can maximize their 401(k) employer match can:
1. Look at Switching to a Self-Directed IRA
Self-directed IRAs are often underused. Their value as an investment tool, however, is quite extensive.
Self-directed IRAs allow investors to diversify their portfolio beyond investing in the usual stocks and bonds. With this, they can invest in other alternative assets like real estate, precious metals, cryptocurrencies, and business partnerships.
These types of assets provide investors benefits that can’t be accessed with 401(k) plans.
Self-directed IRAs can be structured as a Traditional or Roth IRA (as well as some lesser-known options), with each offering different tax benefits.
2. Consider a Roth IRA
Investors who will lose their employer match can also consider switching to a Roth IRA. This type of IRA lets one enjoy tax-free earnings on their investment, provided they don’t make withdrawals before reaching the retirement age of 59 1/2.
A lot of times, investors do not have enough money to contribute to both a Roth IRA and a 401(k). Most employees would rather stick to their employer plan to get the match.
When that match goes away, it may prove to be a good option to switch to a Roth IRA, as it can help reduce any future tax bills.
The benefits one receives from a Roth IRA, however, are delayed until one’s retirement. One doesn’t receive any tax deductions for contributions he or she makes.
3. Research a Traditional IRA
In many ways, Traditional IRAs are similar in structure to an unmatched 401(k).
However, it has the added benefit of giving access to a more diverse set of investments. It also often has a lower annual fee compared to existing work plans.
Traditional IRAs have the benefit of tax deductions for contributions. The taxation applied to the earnings of the investment is also delayed until one withdraws.
If one’s current plan fails to meet his or her investment needs, or charges high fees, then making the switch to a Traditional IRA just might be a better option.
4. Retain the Old 401(k)
Depending on an individual’s goals and circumstances, another option is simply to keep the old 401(k) even without the 401(k) employer match scheme.
Sticking with the plan allows one to continue receiving tax deductions for his or her contributions. It also allows investors to delay taxes on the earnings of their investments until he or she retires.
One is also able to invest more each year in a 401(k) than in an IRA. This allows one to take advantage of a bigger tax deduction.
There is nothing wrong with continuing one’s 401(k) especially if he or she is happy with the fees on the retirement plan and the investment selection in it. Investors, however, should still make sure to consider other options before moving forward.
Challenges of Transferring Money To a New Plan
If one decides to start a new retirement plan, he or she should stop contributing to their discontinued employer matching program. Instead, they should direct those funds towards the new retirement plan.
One should remember that the process may not quite be so simple. As long as the individual remains an employee of the company or business that established the original plan, transferring from an old retirement plan may present some challenges.
Most of the time, companies restrict 401(k) withdrawals while the individual is still an employee. Even if that employee manages to withdraw from the retirement plan, it likely will still not be ideal. This is because one will probably have to pay taxes for the money withdrawn from the account. He or she also needs to pay a penalty of 10% if the individual is below 59 1/2 years old.
Those penalties and taxes might cancel out any benefits the individual gains from the new retirement plan. A big portion of the money that one could have allotted for investing, medical expenses, or retirement plan contributions may instead go to unnecessary taxes.
Ideally, one should transfer the money when either he or she leaves their job or their employer terminates their existing 401(k) plan. In such cases, investors can roll over their 401(k) to another retirement plan without having to pay the penalty of 10%.
If one decides to roll over into a Traditional IRA, they don’t need to pay taxes on the rollover amount. If the person decides to roll over into a Roth IRA, however, the individual has to pay an income tax on the money transferred.
Regardless of the approach, savings that went into the 401(k) are moved in a more effective retirement plan.
Investors can still take advantage of their 401(k) even if their employer match scheme changes or ends. In this type of scenario, investors can choose to retain their 401(k) or transfer their funds to a new plan, such as an IRA.
As always, it is best to consult with a financial planner who can give sound advice when it comes to investing. This is invaluable especially if one wants to build a retirement nest egg that could sustain the lifestyle he or she wants to live after retirement.
Do you have other questions about 401(k) contribution limits and the employer match scheme? Ask us in the comments section below!