I was catching up on some of the blogs I follow, and a post over at Thousandaire caught my eye. The post was titled “401k Match Day is like a Holiday.” I had a few immediate reactions to the post:
- I have lots of friends who are finishing up medical school, so “Match Day” means something else to me.
- I hate that my company has a 401(k) Match Day.
- Wait– other companies do 401(k) matching in a once-yearly lump sum too?!?!?
- 401(k) Match Day is like getting a tax refund. I’ve been meaning to write about how I hate tax refunds too, I should probably write something.
My biggest shock was that I am not alone in receiving my 401(k) match once a year. I thought my company was the only crazy one to go against the grain and do a once-yearly 401(k) match. I am not alone! But unlike Kevin over at Thousandaire, I do not jump for joy when that one day per year rolls around. Don’t get me wrong, I like getting free money, and seeing it appear all at once is pretty exciting, but the problem is: I would rather they add the match with every paycheck!
The reason I want my match every month is because I want to start earning interest on it immediately. I receive my 401(k) match every January for the previous year. So while it’s nice that my employer increased the 2013 match (to a number still so small it’s almost offensive), I won’t see that match until 2014! That’s a whole year of investment gains I’m missing out on and my company gets to enjoy for itself.
It’s for the same reason I hate getting a tax refund. If I withhold too much money from my paycheck for taxes, that means I haven’t been earning interest on that money. As many people put it, if you get a big tax refund, it means you gave an interest-free loan to the government. And really, who would want to do that? I am happy to report that this year, I’m receiving a whopping $350 refund. Perfection!
There is one big difference between 401(k) Match Day and getting a tax refund, though, and it could be quite significant to some. The difference is that if you receive your 401(k) match with every paycheck, that money goes into your 401(k) (duh), and if you adjust your tax withholding so you have less taken out for taxes each paycheck, that money goes into your bank account.
Why is this significant? You can’t touch your 401(k), but you can touch your bank account. That means if you’re the type of person who spends whatever money is available, you may be tempted to spend the additional money you’ll receive each month by altering your withholding. There are many people who look at their tax refund as one of their few opportunities to sock away some extra money. In that case, it’s worth losing out on interest because, well, they wouldn’t have gotten any interest in the first place because they would have spent the money!
Conclusion: Getting your 401(k) match in a once-yearly lump sum may be exciting, but it’s never in your best financial interest. Getting a large tax refund also may be exciting, and may be in your best financial interest if you’re the type who would not have saved it otherwise. However, I encourage everyone to live below their means and save as much as they possibly can out of each and every paycheck!