401(k) Match: What Is It, How It Works

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If your company offers a 401(k) match, get excited. You have an opportunity to stockpile free money for your retirement.

In this article, I’ll explain how a company 401(k) match works, why it’s great and how to calculate your 401(k) match.


Table of Contents


What Is a Company 401(k) Match?

An employer that matches your 401(k) contribution is giving you free, tax-deferred money for your retirement.

An employer that gives you a 401(k) match adds money to your 401(k) when you do. The amount is based on how much you contribute.

Not all employers offer a 401(k) match, but many do. The larger the company, the more likely it is to offer a company match.

“The beauty of an employer match is that it’s the equivalent of an automatic pay raise,” money expert Clark Howard says. “No need to ask your boss, get a good quarterly review or hope your company has a good year so there’s money for a raise!”

Your Human Resources representative should give you information about your company’s 401(k) plan, including any available 401(k) match, during your onboarding process.

If you aren’t currently contributing to a 401(k) but you’d like to start — or if you just aren’t sure about the details of your company match — you can ask your HR department contact.

Whether you’re contributing to one or multiple 401(k) plans, the IRS 401(k) contribution limits for 2021 are $19,500 if you’re younger than 50 and $26,000 if you’re 50 or older.

That’s how much money you can contribute to your 401(k) plan(s) in 2021. However, the limit for total 401(k) contributions, including any company matches, is a different number. In 2021, it’s $58,000 if you’re younger than 50 ($64,500 if you’re 50 or older) or 100% of your total salary, whichever is less.

Why the Money You Get From a 401(k) Match Is So Powerful

Getting free money through a 401(k) match may be the best thing that can happen to you on your quest to fund your retirement.

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Consider this: The most common 401(k) match is 50% of your contributions up to a certain percentage of your salary. Imagine getting a guaranteed 50% return on your investments each year! The S&P 500’s all-time average annual return, adjusted for inflation, hovers between 8 and 10%. So 50% is outstanding.

You’re also getting tax-deferred, compound returns on that money from now until the day you withdraw it.

Once you’ve saved an emergency fund, Clark says, “The highest priority is saving for your retirement.” And within retirement investing, Clark says securing the full 401(k) match that your company offers is the very first step. Not taking advantage of the company match is similar to strolling right past a stack of free money on the ground.


Types of Company Matches

Your company can boost your 401(k) account balance in three different ways, listed in order of prominence:

1. Partial 401(k) Match: For every dollar you contribute, your company contributes between 1 and 99 cents. The most common partial match is 50% of your contributions up to 6% of your salary. So for every dollar you put in, your company would add 50 cents until the amount you’ve contributed is equal to 6% of your salary. A partial match incentivizes you to put in more of your own money to get every possible dollar from your company match.

2. Dollar-for-Dollar Matching: Your company will match your 401(k) contributions dollar-for-dollar up to a certain percentage of your salary. A 100% 401(k) match allows you to secure the maximum amount of money from your company with fewer of your own dollars.

3. Non-Matching Contributions: Your employer puts money into your 401(k) whether or not you contribute. Companies sometimes use non-matching 401(k) contributions for profit-sharing or as a reward for reaching certain goals. Non-matching contributions typically are capped at a percentage of your salary. For example, a company may give every employee a non-matching contribution up to 5% of salary.


How Does a 401(k) Match Work?

When you sign up for a 401(k), you decide the amount of money that you’ll contribute to it each paycheck.

Going forward, your company will automatically withhold the correct amount from your paycheck.

It will deduct the amount you contribute to your 401(k) before taking income and payroll taxes out of your pay. So the money you put into your 401(k) reduces your taxable income.

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Your employer will automatically calculate how much money it needs to put into your 401(k) based on your contribution and its 401(k) match policy. Assuming your company offers partial or dollar-for-dollar matching, it probably will contribute to your retirement account each paycheck.

Company Match Procedure: Rules and Tips

It’s important to understand that, in the overwhelming majority of cases, you won’t receive a 401(k) match from your company unless you’re putting money into your 401(k).

Also, if you reach the IRS 401(k) contribution limit before your final paycheck of the calendar year, you may lose out on a portion of your company match. Some companies contribute to your 401(k) only during pay periods when you’re also putting money in.

Here are some other important nuggets related to 401(k) match procedures:

  • Most employees allow you to participate in a 401(k) plan starting with your first paycheck. But some companies impose waiting periods before you can open a 401(k) or receive a company match.
  • If your company requires a waiting period before offering you a 401(k) match, you may decide not to contribute until the waiting period ends. Just don’t forget to start contributing later. If you need to, set a phone or email alert for yourself as a reminder.
  • Even if you have a Roth 401(k), any company match will go into a traditional 401(k) account. You won’t have to pay taxes on the money your company puts in until you withdraw. The same is true for the money you earn by investing those funds.
  • The IRS withdrawal rules are the same for company match funds as they are for the funds you contribute. Avoid a 10% early withdrawal penalty by keeping every dollar in your 401(k) until you reach the age of 59½.
  • Companies that automatically enroll employees in their 401(k) plans typically set contributions at 3% of your annual salary. If the company will match up to 6% of your annual salary, you’re automatically missing out on some of the free money. Adjust your contribution accordingly to get the full match.

How Do I Calculate My 401(k) Match?

For the purposes of this section, we’ll stick to partial and dollar-for-dollar matching. (We’ll also assume you’re not limited because of certain restrictions that apply only to business owners or really high earners.)

Your company probably articulates its 401(k) match like this: We’ll match X% of your contributions up to Y% of your salary.

That sounds fancy, but it’s not so bad. Let’s start with “X% of your contributions”:

  • If you’re getting a dollar-for-dollar match, X% equals 100%. For every dollar you contribute, your company also puts in a dollar.
  • If you’re getting a partial match, X% can be any number between 1 and 99. But let’s assume it’s 50%. For every dollar you contribute, your company puts in 50 cents.

Now let’s examine “Y% of your salary:”

  • Your employer will stop matching at Y% of your salary. If your company offers you a dollar-for-dollar match, Y is most commonly 3%. If your company offers you a partial match, Y is most commonly 6%. But that number depends on your 401(k) plan.
  • Let’s say you make $100,000 and contribute 2% of your salary to your 401(k) plan. In that case, you’ll contribute $2,000 per year. Because you’re putting in pre-tax dollars, that reduces your taxable income from that job by $2,000. If your company is giving you a 50% match, they’ll throw in another $1,000 for a total of $3,000.
  • So if your company matches 50% up to 6% of your $100,000 salary, and you’re contributing just 2% of your salary, you’re leaving $2,000 of free money on the table.
  • If your company matches 50% up to 6%, the amount that your company will contribute via a 401(k) match will stay the same whether you contribute 6%, 10% or 15% of your income.

Examples of Common 401(k) Matches

That’s a lot of math, so let’s look at the two most common examples in table form:

SalaryMatch % (X)Maximum %
Of Salary (Y)
Your ContributionCompany Contribution
$100,00050%6%$2,000$1,000
$100,00050%6%$6,000$3,000
$100,00050%6%$10,000$3,000
$100,000100%3%$1,000$1,000
$100,000100%3%$3,000$3,000
$100,000100%3%$10,000$3,000

Remember, your company is offering you free money through the match. There’s only so much money they’re allowed to give you, per IRS rules. A company 401(k) match is almost always less than the maximum allowed unless you earn a high salary.

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Look back at the typical way of expressing a company match: X% of your contributions up to Y% of your salary. Your company will stop matching your contributions at Y% of your salary. You can contribute more than Y% of your salary to your 401(k), but you won’t get any additional dollars from your company beyond Y%.

You can plug your own numbers into a good 401(k) match calculator to figure out how much money your company’s 401(k) match can turn into for you during your retirement.


What Is a Good 401(k) Match?

Not everyone in the workforce is an employee, and not all employees get access to a company 401(k) plan. So if you’re getting a company match on your 401(k) contributions, you’re getting a good benefit.

As we discussed in the last section, the most common 401(k) match is 50% up to 6% of your salary. That’s a good 401(k) match.

A 100% match up to 3% of your salary, the second-most common match, arguably is even better. That’s because you can take full advantage of the free dollars your company offers by contributing less money.

Anything less than those two common 401(k) match percentages isn’t bad. But anything more than that is extremely competitive.

The numbers also are relative based on the size of your company. A small company that offers a 50% match up to 6% is doing well. A Fortune 500 type company offering significantly less may be stingy, at least with that portion of their employee compensation.

There are dozens of 401(k) match configurations. If you want to read a real-life example, check out Amazon’s 401(k) match.


What Is a 401(k) Vesting Schedule?

Some companies offer their 401(k) match on what’s called a “vesting” schedule.

That means that you need to work for your company for a certain amount of time before the 401(k) match is all yours, free and clear.

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Usually your company will offer its 401(k) match as soon as you’re contributing to its 401(k). But you could forfeit some or all of your employer’s contributions if you leave your job, voluntarily or not, before a certain amount of time passes.

Vesting can benefit a business by incentivizing you as an employee to stay with the company or else lose out on potentially thousands of dollars in free, tax-advantaged retirement money.

Vesting also helps a company hedge its bets on you in terms of the resources it spends training you in case you leave in fairly short order.

There are two types of vesting:

1. Gradual vesting. For example, your company may release 25% of its match to you after one year, 50% after two years, 75% after three years and 100% after four years. You can still get the full company match starting from your first paycheck, but the company will hold onto it until you’re vested.

2. Cliff vesting. For example, with a three-year cliff, your company may give you 0% of its match contributions until you’ve worked for 36 months. Then the company may release 100% of the match you’ve earned all at once.

Once you’re vested, all of the company’s past match contributions are yours instantly as well as any matching contributions you receive from that point forward.


What if Your Employer Doesn’t Offer a Retirement Plan?

Especially if you work for a small business, you may not have access to a workplace retirement plan.

If that’s true for you, you’ve got to find a way to save on your own. Clark recommends two retirement savings accounts for this situation:

  1. Simplified Employee Pension (SEP) IRA
  2. Roth IRA

A SEP IRA works like a traditional IRA or 401(k) in that your contributions are tax-deductible and tax-deferred. So you’ll pay taxes on that money and your investment earnings only once you withdraw it.

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The paperwork to set up a SEP IRA is simple. You can open a SEP IRA if you’re self-employed or if you own a small business.

Clark is a big fan of the other option: a Roth IRA. You pay taxes on the money before you put it into your Roth IRA, but then it grows tax-free and you withdraw it tax-free.


Final Thoughts

A 401(k) match is a fantastic benefit. If your company offers a match, do your best to take full advantage. You’ll thank yourself during retirement when you aren’t worrying about money.


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