Help me understanding I am using my employer's 401K correctly.

Submitted by david12795 t3_11cz027 in personalfinance

We have Charles Schwab. So my employer is offering this for their 401K:

"We match 125% of contributions up to 6% of an employee's annual gross pay."

Apparently, this is considered generous? So what I did was I am contributing this 7 pre tax. Should I do more, or go down to 6 percent since they said they go up to 6 percent?

The company has also mentioned this: 100% vesting in company matching contributions after two years of service. You're always 100 percent vest in your contributions . What does this mean in laymen's terms? I was hired 12/19/22. I am not sure if I will be there for two years to be honest. Does this get taken away if I leave before two years?

The company has also said this: For associates hired after January 1, 2023, you must complete 1 year of service before you become eligible in the company matching contributions. The company will match 125% on the first 6% of your pre-tax contributions, Roth contributions, and catch-up contributions that do not, in the aggregate, exceed 6% of your eligible compensation. Rollover contributions, Roth rollover contributions, and Roth conversion contributions are not matched. Looks like I lucked out

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Currently, I am putting 7 percent all into Schwab Index Return Trust 2055 IV (SX455). This was what it was defaulted to. I am notsure if i should keep as is, or try to diversify.

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Any advice would be great!!

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DaemonTargaryen2024 t1_ja5vmay wrote

>"We match 125% of contributions up to 6% of an employee's annual gross pay."

For every $1.00 you contribute, employer will put in $1.25. They'll match you up to your 6% contribution, but won't give any more match if you do 7% or higher. 125% of 6% is 7.5% so the employer match is effectively 7.5% as long as you do 6%.

You should do at least the 6%, but ideally higher up to 10 or 15% if you can afford it

>100% vesting in company matching contributions after two years of service.

Employer contributions will be put in regularly and you can see them in your account. But it's not actually yours if you leave the company too soon. If you leave before 2 years, you get none of the employer match. If you stay at least 2 years, all the employer match is yours when you leave.

You still want to contribute, (1) because you still need to save for retirement regardless of match, (2) because you don't want to end up staying 2 years and look back on all the free money you turned down

> You're always 100 percent vest in your contributions

Just means what you contribute is always yours, there's no vesting period for your own money.

>For associates hired after January 1, 2023, you must complete 1 year of service before you become eligible in the company matching contributions

Company won't give any employer match until you've worked there 1 year. But you lucked out, you were hired before then, so you got in before they made the match worse (by requiring a 1 year anniversary). Any new hires miss out on 1 years's worth of match (basically a 6% pay cut as far as I'm concerned)

>Rollover contributions, Roth rollover contributions, and Roth conversion contributions are not matched.

Just means if you rollover an old employer plan into this one, employer doesn't match any of it. They only match your current contributions.

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david12795 OP t1_ja5y5u1 wrote

Thank you! You answered one of my questions that I had. I will continue to contribute. Though I wonder if I should increase my contribution since I do have a Roth IRA with fidelity that’s kinda been neglected.

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longshanksasaurs t1_ja5v8ia wrote

yeah, that's a good match.

your 7% is always your money.

They'll match 125% of 6% = 7.5% of their money goes to your 401k, but it's not really your until you're vested (12/19/2024).

A target date fund is a great place for your money, assuming it has a low expense ratio. Schwab Index target date fund is probably fine. It's a single fund that contains all the diversity you need -- you don't need to invest in other funds.

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david12795 OP t1_ja5wdv8 wrote

Thank you. So I won’t look into diversify my fund. However, now I have another dilemma I am really not sure if I’m gonna end up being there two years, so I wonder if there is a point in still continuing to contribute.

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longshanksasaurs t1_ja5xhqx wrote

Yes, you should still contribute. The tax benefits alone on your money makes it worthwhile.

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david12795 OP t1_ja5zbeb wrote

Thank you I will now.

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longshanksasaurs t1_ja60el9 wrote

Also -- for your piece of mind, if you change jobs, you'll be able to roll over this 401k money to another job, or an individual traditional IRA.

Ideally, you probably want to even save more for retirement -- 15% if you can swing it.

You can diversify in terms of tax strategy by putting your additional retirement savings in a Roth IRA.

Check out the flowchart on this page, it has a lot of other good advice:

https://www.reddit.com/r/personalfinance/wiki/commontopics/

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david12795 OP t1_ja61ey5 wrote

I still have my 401k from my previous job. Do you personally recommend to keep it there or roll it to my Roth IRA or current employer 401k?

Thank you for your help! And I have seen that chart. Maybe I will increase my contribution. Is it better to focus on my employer 401k then Roth IRA? Even if I don’t plan on staying for two years?

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longshanksasaurs t1_ja68l6y wrote

For your previous 401k: only roll it into your Roth IRA if it was Roth 401k money. Otherwise, rolling into your current employer 401k is a fine choice.

For your current contributions: the standard advice is to go in this order:

  1. 401k up to the match
  2. Roth IRA up to the limit
  3. 401k up to the limit
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david12795 OP t1_ja6d7c6 wrote

thank you! ill have to login to my empower (my previous employer) and check to see what it was.

i came across employee pre tax and employee roth 401k when trying to change my contribution amount to 10 percent. for some reason, i got a little confused on what pre tax is, but then thats another word for traditional lol. it seems employee roth 401k is the way to go.

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but thanks for your suggestion, ill focus more on my IRA and then eventually work more on my 401k up to the limit (or as high as i can)

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longshanksasaurs t1_ja7hnt6 wrote

Sure thing. I suggest just using the traditional (pre tax) 401k, then going to Roth IRA, then back to traditional 401k

Here's some reading, if you have the time:

/r/personalfinance/comments/10qwnrx/why_you_should_almost_never_contribute_to_a_roth/

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david12795 OP t1_ja7l5hd wrote

This is very confusing 😫. I thought the general consensus was employee Roth IRA. I had just changed it last night. Ok I’ll read that again later. Hopefully I won’t get more confused lol

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BeeeeefJelly t1_ja5ugx3 wrote

You are correct- if you leave before 2 years you will lose all the money your employer put into the 401K as a match.

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david12795 OP t1_ja5w9iy wrote

Darn. That is a little disappointing to hear. I wonder what I should do now, keep contributing or don’t contribute. I don’t see myself staying there for two years. Though I could be wrong.

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Schrecht t1_ja5z1ww wrote

You get all of your money, and tax advantaged investing is good, even without the employer match.

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david12795 OP t1_ja5za3t wrote

Ok I’ll continue to keep it at 7 percent!

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