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How to Talk to Your College Grad About 401(k) Savings

Aug 09, 2021 4 min read Kali Hawlk

Key takeaways

  • 401(k)s can create financial stability, but young adults may need help understanding why and how to leverage them.
  • Demonstrate how a 401(k) has (or could have) made a difference in your retirement savings.
  • Recent grads may be more open to learning from an outside expert.


Contributing to a 401(k) is one of the easiest things you can do to help ensure your future financial security. And yet 32% of people don’t take advantage of this benefit at all.



Other savers may work for companies that match contributions to 401(k), but they don’t save enough to get the full amount. That’s like walking away from free money or an automatic raise.

When it comes to helping your college student or recent college graduate figure out how to make it in the real world, you want them to know better than to leave a single cent on the table.

Read on for a list of financial tips for college students to help them understand the importance of using 401(k) benefits to their advantage.


Explain the value of a 401(k) to college students before they even get a job

If you have a recent (or soon-to-be) grad in your family, they’re likely applying for jobs, scheduling interviews and comparing offers. This is the best time to illustrate how compensation is more than just a salary.

Organizations that offer a 401(k) may put more money into workers’ pockets where it really counts: their retirement savings. Companies that offer a match typically give plan participants an extra 3% to 6% of their earnings to stash away in a 401(k) (or similar plan, like a SIMPLE IRA)—if they take advantage of it.

Instead of just lecturing your grads about the importance of a 401(k), sit down with them and help them list out all the benefits available at each potential job. What’s the value of each benefit in five or 10 years? An informed choice is one that’s made after all the pieces of the puzzle are on the table (or in the spreadsheet).


The earlier they save, the better

A position that offers a 401(k) plan is a better financial bet than a job that doesn’t provide retirement benefits. It’s not only because of the matching contribution, which helps, but also because of compounding returns.

A compounding return is what can help turn modest savers into millionaires, but it needs decades of time to work. The earlier young adults take advantage of a 401(k) and other investments, the easier it will be for them to save the money they need to be financially independent, stable, and secure.

To get this message across, pull up a compound interest calculator. Play with the numbers to demonstrate how starting early makes it easier to accumulate a nest egg. If your kid is more of a visual learner, there are charts that clearly show the exponential effect of compound interest over time. Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. You may want to seek personalized advice from qualified professionals regarding your personal finance situation.


401(k)s can make saving more automated

Saving isn’t always easy. This is even more true for young adults who are finding themselves with more money than they’ve ever had thanks to a professional, full-time, salaried job. A 401(k) ensures they save something because contributions are made automatically from their paychecks.

Encourage young adults to opt in to their 401(k) plan as soon as they’re able to do so, and to contribute at least enough to get the full employer match if available. That can serve as a bit of a safety net for them—even if it takes some trial and error before they figure out how to wisely manage the rest of their money.


There are (positive) tax ramifications

According to CollegeFinance.com, more than half (56%) of college students have at least one investment account. But if they’re investing in a taxable account, they may want to invest in a tax-deferred account such as a 401(k) or a traditional IRA. No one likes taxes, and the first year your kids get hit with a grown-up IRS bill, it may highlight the importance of reducing their tax bill.

You can explain that the money they contribute in the current year helps reduce their taxable income, which could help them save on the amount of taxes owed. They’ll need to pay taxes when they withdraw the money—but this might be a good opportunity to discuss the importance of balancing tax-advantaged accounts.

If they contribute to a 401(k) and an account like a Roth IRA, they’ll spread their tax obligations around between present and future years. Roth IRA contributions are taxed today, but earnings withdrawn after retirement are tax free. Or if their employer’s plan offers a Roth account option, they could choose to split their contributions to the 401(k) plan into a traditional and Roth account since there are no income limits on 401(k) contributions. In 2022, they can contribute up to $20,500 to an employer plan.

Depending on their income and filing status, they may also be eligible for a Saver’s Credit on their federal tax return for half of their contributions to the retirement plan, up to a credit of $2,000.


Offer a small incentive

If your kids still aren’t getting the message, you could consider incentivizing them. Instead of your normal gifts, offer to match whatever they contribute to their 401(k) in a given month. Encourage other family members, like aunts and uncles or grandparents, to do the same if they want to give monetary gifts. Those contributions could go into an IRA as long as the total annual contribution doesn’t exceed the person’s annual income or $6,000, whichever is lower. Note deductions may be limited based on adjusted gross income and participation in employer’s retirement plan.


Call in outside help

If all else fails, consider that your kids are ready to learn about investments—just not from you. Help them by paying for a financial planner, sharing some of your favorite books on personal finance and investing, or sending them links to articles that explain the importance of taking advantage of 401(k)s and other important saving strategies.


What you can do next

Open up a conversation about investing with your college students by asking questions rather than seeking to lecture. Let them guide you from there, and use relevant data to encourage them to build stable financial futures for themselves.

Please consult your tax and legal advisors regarding your particular circumstances.



Kali Hawlk writes about earning, saving, investing and more, and blogs at GoingBeyondWealth.com.


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