I work two jobs and am fortunate enough to be able to contribute the max of $17500 to my primary job, which matches $0.50 for every dollar up to 4% (total of 2%). I also work part-time at my second job, which has a 3% match that I do not contribute to at this time (I make ~10,000/yr at this 2nd job).
My question is do you think it would be wise to invest in both 401ks, just to take advantage of the free money from the 3% match, as long as I don't contribute >$17500 cumulatively? I know we're only talking about ~$300/yr in the 2nd job, but hey, free money is free money!
First of all, if you are under 50 years old the most you can contribute cumulatively to a 401(k) plan is $17,500 for 2014 even if you have several jobs that offer you a 401(k). If you are over 50, you can contribute and additional $5,500. It is not just about getting a match but getting the most match. With that in mind, if it is feasible for you, I would suggest contributing 100% of your salary from job two into that 401(k) plan with the 3% match and make up the difference in contributions to job one’s plan with the 2% match. As the other advisors mentioned, evaluate the investment returns and fees in both plans to make sure you maximize your contributions to the right plan. Please contact us at 415-345-8185 if you would like further guidance.
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Free money is free money. So how do you decide? Two considerations to chew on:
1) Is the second plan comparable to the first? What you gain in free money could be lost to poor investments or higher fees.
2) An extra $300/year invested for 20 years with 6% returns has a future value of $11,036, ignoring inflation. It's nothing to sneeze at, and it probably won't let you retire early either. If you have less than 20 years, the benefit is lower. More than 20 years, it goes up a bit.
Weigh these considerations out and see what makes sense for you.
Kyle, take the match. Though anything is possible, I would not expect a 3% or more variation between like investments in the different plans. I don't see any practical downside to taking the match.
Additionally, look at both plans to see which is the better plan. If your second job offers a better plan; lower expenses, better investment choices, greater diversification, you might want to consider putting more into that plan. If you like the second plan better, you could, if you wish, put up to your entire $10,000 salary into that plan. You do not have to decide that today, but you should start taking that match tomorrow.
If you were just contributing to one plan, it is likely the administrator would not allow you to contribute more than $17,500. However, because you will have 2 plans, it is incumbent on you to be sure you do not contribute more than the limit. If you over-contribute, you have until April 15 of the following year to take a ‘corrective distribution’, and have the overpayment and any interest earned declared as taxable income; any amount….no penalty, but it’s a pain. Very important; if you make your corrective distribution after April 15, you will be subject to double taxation. That is, you will be taxed on principal and earnings for the year the contribution was made, and then again on the year it was distributed.
There is another consideration. If you are over 50 years of age you can contribute an additional $5500.