If you work for a company, organization, or government entity that offers a retirement plan, like a 401(k), 403(b), or 457, it’s an excellent way to invest for the future and reduce your taxes. In addition to regularly contributing a portion of your paycheck, you may get extra money from your employer through a “match.”
This article will review how retirement plan matching works, ways to maximize it, and what to do if you don’t have a retirement account or matching at work.
What is 401(k) matching?
A 401(k) match is when an employer contributes to your retirement plan based on how much you put in. While employers that offer a retirement plan aren’t required to pay matching funds, a majority do because it’s a valuable benefit that helps attract and retain good employees.
Retirement plan matching can also encourage you to participate in a retirement account, maximize additional funds from your employer, and invest more for a secure future.
What are 401(k) contribution limits?
No matter the type of retirement account, there are annual limits to how much you can contribute. For 2024, you can put up to $23,000 into most workplace retirement plans. If you’re over 50, you can make catch-up contributions of $7,500, for a total of $30,500.
But the good news is that employer matching doesn’t count against the employee’s annual limit! For 2024, the total pre-tax and after-tax contributions from you and your employer are up to 100% of your salary or $69,000 (or $76,500 if you’re over 50).
How does 401(k) matching work?
When an employer sets up a retirement plan, they can customize many features, including the match. They might choose to offer no matching funds or a generous one.
Employers can also contribute to your retirement plan regardless of how much you contribute. For example, your employer may have a profit-sharing plan that pays you quarterly or annually based on the company’s performance.
Laura reviews five options for managing your retirement account with an ex-employer. Listen to that episode in the player below:
Example of partial 401(k) matching
Companies usually choose to pay either a partial or full retirement match. With a partial, your employer matches a portion of the amount you put into your account up to a limit.
For instance, a partial matching example could be receiving 50% of your contributions up to 6% of your salary. If you earn $100,000 annually, 6% of your salary is $6,000. If you contribute at least $6,000 over the year, your employer will match 50% or contribute $3,000 on your behalf.
Therefore, to get the maximum match in this example you must contribute at least 6% of your salary. If you contribute more, such as 10% or $10,000, your employer would only match half of 6% of your salary, or $3,000.
Even if you max out a 401(k) for 2024 by contributing $23,000, the most employer matching you’d receive is $3,000, for a total contribution of $26,000.
Example of full 401(k) matching
With full employer matching, your employer matches 100% of your retirement contributions up to a limit. It’s also called dollar-for-dollar matching.
For instance, a full matching example is receiving 100% of up to 4% of your salary. If you earn $100,000, your maximum match is 4% or $4,000. But if you only contribute 2% or $2,000 annually, your employer would put in $2,000.
Example of combination 401(k) matching
Some employers use a combination of partial and full matching. For example, your employer could match 100% up to 3% of your salary. Then, they could match 50% up to another 2% of your salary.
In that combo scenario, you’d max out the match if you earn $100,000 and contribute 5% or $5,000. You’d receive $3,000 ($100,000 x 3% x 100%) plus $1,000 ($100,000 x 2% x 50%) for a total match of $4,000. Contributions you make above 5% of your salary wouldn’t be matched.
READ ALSO: Can you contribute to a 401(k) and an IRA in the same year?
How to maximize 401(k) matching
No matter the retirement matching formula your company uses, the takeaway is always to contribute enough to receive the highest possible contribution. Otherwise, you’re turning down money that could grow in your retirement plan instead!
Since matching contributions are free money, they give you an immediate return on your investment. If you receive dollar-for-dollar matching from an employer, you double your money as soon as you contribute. That doesn’t account for the growth those matching funds may obtain through your chosen investments.
However, to reach your retirement goals, you’ll likely need to contribute more than what’s necessary to max out any matching funds. A good rule of thumb is to invest at least 10% to 15% of your gross income. For instance, if you receive a full match of 4% from your employer, ideally, you’d contribute 11% to hit the 15% target.
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Can you get Roth 401(k) matching?
If your employer offers an after-tax Roth retirement option, the annual contributions limits are the same as those of a traditional pre-tax account. And your company can match your Roth contributions just like a traditional retirement plan.
However, matching funds typically get deposited into a separate traditional account instead of your Roth account. They’re generally paid to you pre-tax, so you won’t have to pay income taxes on your matching contributions.
Note that new legislation in the SECURE Act 2.0 allows for post-tax matching contributions; however, it’s up to the employer whether to offer them.
READ ALSO: How to use a mega backdoor Roth conversion
What is 401(k) vesting?
Many retirement plans come with a vesting schedule that applies to funds from your employer, like matching and profit-sharing. That means you must remain employed for set periods before you own those contributions. However, you’re always 100% vested in your own contributions that come from your paycheck.
For example, you might have a five-year vesting schedule that happens gradually, such as owning:
- 20% after year one
- 40% after year two
- 60% after year three
- 80% after year four
- 100% after year five
In this scenario, if you received $3,000 in matching in your first year of employment and got terminated or decided to leave at the beginning of year two, you’d only own 20% or $600. You’d forfeit the remaining $2,400 to your employer. But staying employed for five years means you’d own 100% of any employer contributions to your retirement plan.
Cliff vesting is another type where you own employer funds at once on a specified date, such as after three years of employment. If you leave the company before then, you’d own none of your employer’s contributions to your retirement plan. So, check your plan’s rules before deciding to change jobs.
Another rule is that highly compensated employees (HCEs) may not be eligible for complete employer matching. The IRS defines them as owning over 5% of a company or making over an annual threshold for the prior year.
For 2023, the HCE threshold was $155,000. You may only qualify for part of the employer match if you earned more. So, be familiar with what’s allowed at your company.
What if you don’t have 401(k) matching?
If you don’t receive 401(k) matching, it’s still wise to contribute at least 15% of your gross income. If you don’t have a workplace retirement plan, consider investing through an individual retirement account (IRA) or a self-employed plan if you have part- or full-time business income.
For those fortunate enough to receive matching funds at work, it’s an excellent way to boost your savings, reduce taxes, and achieve your retirement goals.