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I recently joined a personal finance community that hosts financial talks, virtual happy hours, and guest speakers. My friend Amberly came up with this great idea and it didn’t take me long to get on board. As our host, she has done a remarkable job covering relevant topics in a very refreshing manner. Concise, factual, quantitative are a few words that describe her delivery; however, the main highlight is her ability to share the message in an easy-to-understand and super digestible fashion. A couple of weeks ago she asked me if I would be willing to come as a guest to share a presentation about a relevant topic. The result was a fun chat about employer benefits.

At work, we also have a personal finance group that gets together every other week to have a beer and chat about benefits, investment vehicles, and thoughts on different strategies.

Recently, we met and discussed benefits so I was pretty happy to recycle some of that information for the benefit of our new community.

401(k)

A 401(k) is a company-sponsored retirement account that employees can contribute to. Workers can make contributions to their 401(k) accounts through automatic payroll deductions and employers can, in some cases, offer a match to those contributions.

There are two (2) basic types of 401(k)s, a pre-tax or traditional, and a Roth; however, some employees might receive the benefit of an after-tax 401(k). They all have pros and cons but the main difference between these accounts is in how they’re taxed.

In a traditional 401(k), the employee contributions reduce their adjusted gross income (AGI) taxes for the year they are made, but withdrawals are taxed. With a Roth, employees make contributions with post-tax income where withdrawals are tax-free. The after-tax is similar to the Roth; however, the balance can be transferred via an in-service withdrawal to a Roth IRA.

Provided your employer allows for contributions to all three (3) types of accounts, you are free to invest in all of them. However, it is important to know there are annual contribution limits set by the IRS.

As of 2020, the basic limits on employee contributions are $19,500 per year for workers under the age of 50 for Traditional and Roth 401(k) combined. If you get a match, that amount does not count toward the $19,500 limit.

Account	Age	2020
401(k)	<50	$19,500
Catch up	50+	$6,500

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Now, how do we couple the $19,500 annual contribution limit with the defined contribution plan set at $57,000 per year, and after-tax contributions to a 401(k)?

Let’start with some definitions.

The Defined Contribution Plan

It is a fancy term that covers the sum of all buckets of a retirement plan. The total contribution limit for both employee and employer contributions to a 401(k) defined contribution plans under section 415(c)(1)(A) sits at $57,000 ($63,500 if age 50+) for 2020.

In general, you may find the following items included as part of the defined contribution plan:

• Employee contribution to a 401(k)
• Company match in a 401(k)
• Pension plan contribution
• After-tax contribution in a 401(k)

Employee Contribution

This is pretty straightforward. If an employee decides to contribute to their 401(k) they might do so by indicating the desired amount on your plan administrator website. Deductions take place via payroll deductions so it is all fully automated.

I like to consider contributions to a 401(k) a form of dollar-cost averaging and a way to pay yourself first. Even though we do not believe in timing the market, you may choose to adjust your contributions at any given time; however, my suggestion is to set it and forget it.

In our case, we contribute enough to get the match offered by my employer and more to maximize annual contributions at $19,500. The math is simple, all you need to do is calculate the ratio between the annual limit and your salary. The result multiplied by 100 is your percent contribution. Below is the formula:

Contribution (%) = ($19,500/salary) x 100

Company Match

Most companies offer some sort of matching contribution to attract and retain talent. Simply put, for every $1 you contribute to your company 401(k), your company will contribute a specific percentage (%) to your plan.

Getting a match from day one depends on your company. Some may want you to work for a few months before matching begins while others may offer it from day one (1).

People like to call a company match “free money”, in reality, it is not. It is included in your total compensation so you are working for it.

Getting a match is a great benefit. On average matching contributions can range between 3-6%; however, your employer will require a minimum contribution to the plan. You can elect to contribute the minimum amount stipulated by your plan or exceed to add more funds to your retirement plan.

The table below shows the value of a 401(k) match. It also demonstrates the importance of your contributions to make sure you get the match. Additionally, you can see this employee could contribute up to 19% (assuming there’s no cap by the employer) of their paycheck to hit $19,000 per year for a total of $24,000!

Salary	Employer Match (%)	Employee Contribution (%)	Employer Match ($)	Employee Contribution (%)	401(k) Total
$100,000	5%	3%	$0	$3,000	$3,000
$100,000	5%	4%	$0	$4,000	$4,000
$100,000	5%	5%	$5,000	$5,000	$10,000
$100,000	5%	6%	$5,000	$6,000	$11,000
$100,000	5%	7%	$5,000	$7,000	$12,000
$100,000	5%	10%	$5,000	$10,000	$15,000
$100,000	5%	15%	$5,000	$15,000	$20,000
$100,000	5%	19%	$5,000	$19,000	$24,000

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As you can see, not contributing to a 401(k) and foregoing a match is quite frankly a dumb idea. If you’re prioritizing debt repayment my recommendation is to evaluate ways to restructure the debt while contributing to your 401(k).

If your 401(k) plan sucks, which normally means high expense ratios (>1%) and you don’t get a match, then you may have an argument. If not, please reconsider your strategy.

Pension Plans

I’m not going to spend too much time on this one as most companies may not offer pension plans outside of a 401(k). My only recommendation is to find out if you have any additional contributions from your employer to a pension plan or other vehicle considered a retirement fund. This will come handy for estimating the $ amount you may be allowed to contribute to an after-tax 401(k)

After-Tax Contribution

A lot has been written about after-tax contributions to a company-sponsored 401(k). I wrote a post about it and so has the madfientist. We call it the mega backdoor Roth strategy.

Here’s how it works.

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The graphic includes three (3) main assumptions:

1. Annual base salary at $100,000.
2. Access to after-tax 401(k) contributions
3. Employer allows 50% contributions via payroll deductions

If we consider (1) different salaries, (2) a company match at 5%, (3) a pension plan at 3%, and (4) a cap on your contributions at 30%, we get the following scenarios.

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Contributions of after-tax dollars inside your 401(k) is an interesting proposition. We’ve executed mega-backdoor Roth conversions for the past couple of years but the main reason is that my employer allows for an unlimited number of in-service withdrawals to a Roth IRA.

If your employer allows for after-tax contributions inside your 401(k) but does not allow for in-service withdrawals then you’re probably better off investing that money outside of your 401(k).

Doing in-service withdrawals used to be easy for us. All it took was a phone call to Fidelity to move the money from my 401(k) to my Roth IRA account. I had to be very specific and use the words “in-service withdrawal” so I suggest you do the same.

Employee Max Payroll Contribution

The previous graph shows that hitting the $57,000 limit can be difficult. It requires discipline, automation, and keeping track of your numbers. For those on the lower range in salary don’t lose hope, you still have options outside of a 401(k) such as IRAs and a brokerage account.

Know your options, do your best and enjoy the rest.

Now, if your employer does not impose any limits, be grateful because you are one of the lucky ones. For reference, I’m capped at 15% 🙁

Health Savings Account

Now, that we’ve covered most aspects of a 401(k), let’s chat about my favorite account. The Health Savings Account.

Todd Berkley defines an HSA as a “tax-advantaged account designed to save and pay for certain health-related expenses tax-free”. I agree with that definition; however, I would add the word “invest”.

Some view an HSA simply as a checking account for medical expenses. Forget about this boring definition and know it is much more than that.

An HSA is by far the best tax-advantage vehicle created by mankind. It allows eligible individuals to divert a portion of their income to an account from which they can reimburse eligible expenses tax-free and efficiently save and invest for present or future health care expenses.

To become eligible you need to enroll in a High Deductible Health Plan – HDHP and meet other eligibility criteria.

Regardless of how you decide to manage your money, an HSA has four (4) unique advantages:

1. Contributions are pre-tax,
2. Balance growth is tax-deferred
3. Qualified withdrawals are tax-free and
4. Funds roll over as opposed to a Flexible Spending Account (FSA).

If you read this post, you’ll see how we manage our health savings account. Our strategy is simple. We max it out every year. As of 2020, the annual contribution limit is $3,550 for individuals and $7,100 for families.

Maximizing Your Benefits

These are some scenarios for your consideration:

1. No match and no access to after-tax contribution inside 401(k)

Account	Amount
401(k) Employee Pre-tax and/or Roth	$19,500
Health Savings Account	$7,100
Total	$26,600

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2. No access to after-tax contribution inside 401(k) and in-service withdrawal

Account	Amount
401(k) Employee Pre-tax and/or Roth	$19,500
401(k) Employer match	$5,000
Health Savings Account	$7,100
Total	$31,600

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3. Access to after-tax contribution inside 401(k) and in-service withdrawal

Account	Amount
401(k) Employee Pre-tax and/or Roth	$19,500
401(k) Employer match	$5,000
401(k) After-Tax	$32,500
Health Savings Account	$7,100
Total	$64,100

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Think about scenarios 1-3 and imagine pulling it off for 30 years. Not only that, think about additional work you could do outside of the defined contribution plan via an IRA and a brokerage account.

I know, I know … a lot of assumptions here but you get the point. Save, invest, and let time and compounding do the rest. Your older self will be forever grateful for it.

Other Benefits

A lot of companies offer their employees benefits they are not even aware of. They are usually advertised in some sections of your intranet or you can simply reach out to HR.

We thought we were up to speed with our benefits but it wasn’t until last year that we found we were eligible for 15 days per year for back up care at a ridiculous subsidized rate. We started using the service in November and were able to use 13/15. Needless to say, we had a few date nights.

Below are additional benefits we have access to and that we actively use:

• Daycare allowance
• Estate planning
• Cell phone allowance
• Backup care
• Gym allowance
• Car purchase (new)
• Software & hardware
• Lift tickets
• Museum tickets
• Zoo tickets
• Ballet
• Sport Events
• Movies, hotels, car rental
• Airport parking 
• Downtown restaurants

Final Thoughts

Look, I know everyone’s situation is unique; however, consider the following options and do what is best for you:

• Do you get a match? if yes, contribute up to the match.
• If you don’t get a match, check your fund options and their fees. 
• Do you have access to an HDHP? if yes, open an HSA and max out.
• I did not cover IRAs but open a traditional/Roth IRA and invest via DCA or lump sum. This is even more important if your 401(k) plan sucks AND you don’t get a match. 
• If you max out your IRA go back to your 401(k). 
• Consider maximizing your 401(k) pre-tax or Roth.
• Confirm if you have access to after-tax contributions inside your 401(k) if your employer allows in-service withdrawals then go for it. If not, let it go.
• If you max out your pre-tax or Roth 401(k), fund the a-tax bucket only if in-service withdrawals are allowed.
• Increase your awareness of “Other” benefits and take advantage of them.

Finally, I want to thank Amberly for asking me to present this topic to our community. If you want to connect with her you can find her in all major social media platforms (Facebook: amberly.grant1 / Instagram: @amberlygrant). Maybe, I’ll see you in future events 🙂

Until next time … JJ