Raise or 401(k) Match?

A co-worker and I were talking the other day and we started discussing the pros and cons of getting a salary increase versus a 401(k) match.

Our company cut both in 2009 and there’s no shot that we’re getting both raises and reinstatement of the 401(k) match.  Frankly, I’m not convinced that we’ll get either.  We’ll probably find out in the next month or so if there is any benefit increase for 2011, though as I said, I’m not holding my breath.

I’m curious as to what the thoughts are as to which is better.  My co-worker was squarely in the corner of the 401(k) match, as the tax benefits and encouragement to save for retirement outweighed the benefit of having a larger paycheck.

I agree with him on these points, but he went so far as to say that a 1-2% 401(k) match would be more favorable than even a 3% raise.

This is where I’m not convinced.  I figure, even with the tax implications, I could get a 3% raise, dedicate 1% of that to increased contributions in the 401(k) and still end up with probably 1.5% more take home pay.

His argument (and again, it was hard to disagree with him) was that, while he and I would probably dedicate some or all of a raise to a 401(k) match, the majority of people probably wouldn’t, and would just take home the money (and spend it).

What do you think?

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7 thoughts on “Raise or 401(k) Match?

  1. Short-term, I think a raise is better right now, only because everyday costs are rising and our salaries aren't keeping up with the prices/inflation. I won't be surprised if this will be my third year with no raise. But they haven't touched our 401(k) match, which tops out at $1k per year.

  2. The question is which is the most beneficial to the employee. Correct? Seems like the answer would be your suggestion of a pay increase. And what individuals actually do with the money is up to them.

    Heck, an employee could take the money out early from their 401k. Granted with huge penalties and taxes.

    Also, I'd rather add to a Roth IRA instead of more to the 401k.

    Just my 2 cents. 🙂

  3. Intuitively a 3% pay raise is larger than a 2% 401(k) match, assuming you put 2% into your 401(k), because then the tax consequences would be a wash for the contributed amount and you would still have additional money in your pay check.

    A possible advantage of an increased match is that the employee would need to contribute more to the 401(k) in order to obtain that match, which means that a 2% match would generate a 4% net increase in 401(k) contributions.

    The main goal, to me at least, would be to always put at least a portion of the raise in the retirement savings. My personal rule of thumb, prior to retiring at 58, was to always put 50% of any raise into savings.

  4. I'd prefer the raise. Then I can put the money in my Roth IRA or do whatever else I'd like with it. If I had to pick one, I'd take the raise, but if the 401(k) match was bigger, then I'd obviously want that.

  5. For me, it's a toss-up. My employer puts in up to $200/year towards the 401K. After 4 years of employement, I finally got a 25 cent raise (you read that right- a quarter raise), which works out to $250/year before taxes. Now, the employer is eliminatig the 401K so I guess I don't have to worry about it anymore. Just give me a raise!

  6. In the long term, a raise is usually compounding. This is why many companies avoid raise, or give a 1-time stipend.

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