Amazon is one of the largest employers in the United States. Recent data shows that Amazon employs roughly 950,000 U.S. workers — that’s one in every 153 workers.
Whether you’re a current Amazon employee, considering working for Amazon, or are simply curious about the benefits that Amazon offers its employees, you might be wondering how the company’s 401(k) plan works.
Does it offer a 401(k)? What sort of investment options does it provide? What’s the matching policy? We’ll answer all of those questions and more in this article.
What is Amazon’s 401(k) Plan?
Like many major employers, Amazon offers its employees a 401(k) plan to help them save for retirement.
Under the plan, Amazon allows its employees to contribute between 1% and 9% of their salary to either a traditional or Roth 401(k), or use a combination of the two. Amazon employees can choose to invest their contributions in one or more of the following funds:
Amazon.com Stock Fund
American Beacon Small Cap Value Fund R6 Class
American Funds EuroPacific Growth Fund Class R-6
Oakmark International Fund Class Institutional
RIMCO Total Return Fund Institutional Class
State Street Russell Large Cap Growth Index Non-Lending Series Fund – Class C
State Street Russell Large Cap Value Index Non-Lending Series Fund – Class C
Vanguard Explorer Fund Admiral Shares
Vanguard FTSE Social Index Fund Institutional Shares
Vanguard Institutional 500 Index Trust
Vanguard Institutional Total Bond Market Index Trust
Vanguard Institutional Total International Stock Market Index Trust
Vanguard Retirement Savings Trust III
Vanguard Target Retirement Trust Select
Vanguard Target Retirement Income Trust Select
Full-time and eligible reduced-time Amazon employees are automatically enrolled in the company’s 401(k) plan 90 days after hire unless they unenroll or actively enroll themselves. Employees who are automatically enrolled will have their contributions invested into a target-date fund. Employees can also choose their own investments from the provided options.
Amazon’s 401(k) Contribution Matching
Like most companies that offer a 401(k) plan, Amazon matches its employees’ contributions up to a particular percentage of their salary. Currently, Amazon will match 50 cents on the dollar of the first 4% of your salary that you contribute to your 401(k) plan. Ultimately, this results in a maximum 2% contribution.
So how does this compare to other employers?
According to one study, the majority of employers in the United States offer between 3% and 6% for a promised match. The average promised match was 4.5%. This data is consistent with a similar study, which found the average 401(k) employer contribution rate to be about 4.7%.
As you can see, the average employer contribution is considerably larger than Amazon’s — in fact, it’s more than twice the match that Amazon offers its employees.
In addition to contribution matching, another important concept when it comes to employer-sponsored retirement plans is vesting, which refers to the amount of time before you take ownership of a certain employee benefit.
In all 401(k) plans, you are immediately fully vested in your own contributions. In other words, you alone own that money. But that’s not the case for any contributions Amazon makes to your 401(k) plan. Instead, you won’t become vested in Amazon’s 401(k) contributions until you’ve worked for the company for three years.
How Much Should You Contribute?
Now that we’ve talked about how much Amazon contributes to its employees’ 401(k) accounts, you might be wondering how much you should contribute.
At the very least, make it your goal to take advantage of Amazon’s full employer match. This requires you to contribute at least 4% of your salary to your 401(k) plan. So if you earn $100,000 per year, you would contribute at least $4,000 to get the $2,000 match from Amazon.
But for most people, contributing $4,000 per year won’t provide for a comfortable retirement. Because of that, you may wish to contribute more. If you aren’t sure how much you’ll need to save to reach your retirement goal, you can try out Personal Capital’s Retirement Planner. This helps you calculate your monthly contributions to reach your target spending goals.
The IRS allows you to contribute up to $19,500 to your 401(k) plan each year, but remember that Amazon’s 401(k) plan isn’t your only option for retirement savings. You can also take advantage of an individual retirement account (IRA). Depending on your 401(k) investment options, you may choose to prioritize investing in your IRA after earning your full employer match.
How Does the Amazon Mega Backdoor Roth Work?
Amazon allows its employees to contribute their traditional 401(k) contributions to Roth contributions using an in-plan conversion. This conversion option allows employees to reduce their tax burden in the future in exchange for paying taxes now.
Using Amazon’s Roth conversion, you can convert eligible assets to a designated Roth account in your workplace retirement plan. Eligible assets include:
Assets in a former employer’s plan (if eligible)
Assets rolled over from another plan to your Amazon 401(k)
Assets in your plan if you’re over the age of 59½
Employer contributions such as profit sharing or matching contributions
Roth accounts are well-suited to those who expect to be in a higher tax bracket during retirement. The downside is that you’ll have to pay income taxes on any money you convert. But in exchange, you won’t have to pay income taxes on your distributions during retirement.
Amazon’s 401(k) plan also allows employees to invest directly with after-tax dollars into a Roth account, up to the annual 401(k) limit. You can even choose to split your contributions between a traditional and Roth account to diversify your tax benefits.
How Should You Invest?
One of the most difficult decisions you’ll have to make for your 401(k) account is how to invest your contributions. There’s no one right answer, but there are a few factors to consider to help you choose the right investments for you:
Time horizon: Your time horizon is the number of years before you expect to use your investments. In the case of retirement funds, your time horizon is the number of years before you plan to retire. In general, the longer your time horizon, the more aggressive you can afford to be with your investments.
Diversification: Diversification is a critical component of investing. The general concept is that you spread your money across many assets, both across and within asset classes. The more diversified you are, the less the performance of a single investment will impact your entire portfolio.
Risk tolerance: Your risk tolerance is how comfortable you are with risk. Investors with a higher risk tolerance are comfortable taking a greater risk for a higher potential reward, while those who are more risk-averse will accept a lower potential return in exchange for a lower risk.
For investors who are uncomfortable choosing their own investments, a target-date fund can be a great option. A target-date fund is a type of mutual fund that’s associated with a particular retirement year. The fund manager builds a diversified fund, adjusting the holdings as the time horizon shrinks.
What Happens to You 401(k) If You Quit?
If you leave your job at Amazon, you have a few different options for what to do with the money in your 401(k) plan. First, you can simply decide to leave the money where it is. You might go this route if you aren’t moving to a company that offers a 401(k) or if the plan at your new company isn’t as good as the Amazon plan.
Next, you can roll your Amazon 401(k) plan over to a 401(k) plan at your new company. The benefit of this option is the simplicity — You only have to keep track of one retirement account, rather than keeping track of one at each of your former jobs. To roll money from a former 401(k) to your Amazon 401(k) plan, contact your plan administrator, Fidelity.
Next, you can decide to roll the money into your 401(k) over into an IRA. You can choose between a traditional IRA or a Roth IRA, but keep in mind that if you roll the money over from a traditional 401(k) to a Roth IRA, you’ll have to pay income taxes on the entire amount.
Finally, you can take a lump-sum distribution from your Amazon 401(k) plan (also known as cashing it out). While this option might seem the most attractive at the moment, it should be saved as a last resort.
First, cashing out your 401(k) is robbing your future self of retirement funds. And since time in the market is one of the most important factors for how your investments grow, cashing out what you’ve saved could result in a huge cut to your retirement savings. Another downside of cashing out your 401(k) is that in addition to paying income taxes on the amount you withdraw, you’ll also pay a 10% penalty.
Can You Roll Over an Old 401(k)?
If you have a 401(k) from an employer you worked for before Amazon, you can roll the assets in that account over into your Amazon 401(k).
Before moving your money over, be sure to compare the two plans when it comes to expenses and investment options. While you can’t continue contributing to your old 401(k), there’s a good chance you can leave the money where it is. And if your old employer’s 401(k) plan has lower fees or better investments, you may find it’s better to just leave it.
That being said, if you decide your old 401(k) plan expenses and investment options aren’t worth keeping it open, then you can roll it into your Amazon plan. To do so, just contact your old 401(k) plan administrator and provide the information they need about your new plan. They’ll either transfer the money directly to the new plan or send you a check for the full amount, which you can then give to your new 401(k) plan administrator to deposit into your account.
Once you roll your old 401(k) plan over into your Amazon 401(k) plan, the money will be invested the same way as the rest of your account, and it will all become a part of the same pool of money.
The Bottom Line
Your company 401(k) can play an important role in building up your nest egg. How else can you prepare?
Learn all about your 401(k) in this free guide.
Sign up for Personal Capital’s free and secure financial tools. Once you link your financial accounts, you’re able to track your complete net worth. You can also plan for retirement, monitor your spending, and analyze your investments, including your 401(k) and other brokerage accounts.
Consider speaking to a fiduciary financial advisor, who can help guide you to the retirement you want.
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Personal Capital compensates Erin Gobler (“Author”) for providing the content contained in this blog post. Author is not an advisory client.
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