Don't Mess With Taxes

Reviewed and updated Nov. 23, 2023

Happy Thanksgiving Day! Once you retire, you might be able to spend the holiday in a different way, depending on your golden year dreams and how much money you've saved for post-work years. (Photo by sterlinglanier Lanier on Unsplash)

How's your Thanksgiving morning going? It's pretty quiet at our house, since it's only the hubby and me. And aside from baking a pumpkin pie, our meal is Texas smoked brisket, sausage, and sides we picked up from a local barbecue joint yesterday afternoon.

If your Turkey Day is more hectic, enjoy! When I was growing up in West Texas, my mom's parents lived just across our small town. Most years, some of my mother's three sisters and their families showed up for my Mam-ma's Thanksgiving dressing and my Mum's pumpkin pie (yes, the recipe I still use), and then Christmas, too.

Those holidays were crazy. But fun, especially since I was a kid and didn't have to do anything except play and eat or, as I got older, gossip with my teenage cousins.

The crazy can be, well, crazy. It may have you thinking about a time when you can retire. Maybe far away from that annoying uncle who won't stop talking politics or that ditzy half-sister who keeps following you from room to room asking about your single friends.

Whatever your retirement plans, you'll need the financial wherewithal to make it happen the way you want. One of the best ways to accumulate a nice nest egg is to take advantage of your workplace retirement plan, typically a 401(k).

That retirement saving option is the ol' blog's second Thanksgiving season tax turkey. Specifically, too many people don't enroll in the savings plan. And some who do, don't contribute enough to get the 401(k)'s maximum benefit.

Here's how to tackle this tax turkey.

Workplace help for when you leave it: Company-sponsored 401(k) plans are a great benefit.

Once you enroll, your contributions are automatically taken out of your pay so you don't have to worry about them.

If your 401(k) is a traditional one, the money comes out before your payroll office figures the taxes that also come out of your paycheck. That could help offset your retirement contribution bite a bit.

Some companies also offer Roth 401(k)s, where contributions are made with after tax dollars. This means, as with a Roth IRA, you won't owe tax on the company plan money when you eventually take it out in retirement.

But the best benefit of a workplace 401(k) is that most employers match at least a portion of their employees' contributions. This is additional contributions made by employers, on top of the money put in by workers.

To get the match, though, you have to put in some of your own money. And to get the most from your employer, you need to put in the maximum match amount.

How company 401(k) mating works: Employer 401(k) matches are a percentage of workers' contributions to their accounts.

This is an option chosen by your boss. That means that 401(k) match amounts can vary widely. Your company may be very generous when it comes to matching workers' retirement contributions. Or it might be more limited.

Regardless of the match amount, you want to make sure you get the most additional money from your company.

A common company match is 50 percent of what you contribute, up to 6 percent of your salary. Say, for example, your salary is $80,000 per year. In this case, your company will match half of your 401(k) contributions, up to a maximum of 6 percent of your salary. That's another $2,400 for you.

Here's the math:

But if you contribute only $4,000, your boss' match is only $2,000. You're leaving $400 of free money on the table.

Many ways to describe matches: Also note that match amounts are spelled out in a lot of different ways. The 50 percent up to 6 percent of your salary used in the above example might be phrased as —

• 50 cents on the dollar up to 6 percent,
• 50 percent on the first 6 percent, or
• 3 percent on 6 percent.

Yeah, I don't know why the ubiquitous "they" make things more complicated than they need to be. But don't let confusing 401(k) match language dissuade you from contributing.

If you're puzzled by just what your plan's match terms mean in real dollars, get clarification from your 401(k) administrator or your employer's human resources department

Do your personal math: Every person's financial situation is, of course, unique. You've first got to look at your own circumstances and determine whether you can afford to participate in your company's 401(k).

But if you can put in any amount, a company match will boost your workplace retirement amount.

And if you can swing contributing at least enough money to receive the full employer match, all the better.

If you do decide you can put in more, contact your aforementioned 401(k) administrator or HR department when you get back to work after the holiday break.

Yeah, you might not have many pay periods left this year, but every additional amount helps, both in dollar amounts and ultimate compounding of your nest egg.

So the sooner you up your 401(k) contributions — to your company match amount if possible — the more retirement stash, from you and your boss, you'll collect.

Addendum, Sunday, Nov. 27, 2022: The goal of Don't Mess with Taxes is to talk turkey when it comes to tax matters. But if you're looking for some literal turkey talk, check out my November post at my tumblr tax blog, Tumbling Taxes. It includes a video of Texas turkey callers.

You also might find these items of interest:

• Tax-favored retirement savings get cost-of-living 2024 boost
• 6 workplace benefits questions to ask yourself during open enrollment
• IRS delays Roth workplace retirement plan catch-up requirement to 2026

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