How to Understand and Leverage Your Employer’s 401(k) Matching

December 21, 2020

Saving for retirement is a critical part of financial planning, and many of us rely on employer-sponsored 401(k) plans. But do you truly understand your employer's 401(k) matching program? It’s often one of the most valuable benefits you’ll receive, and taking full advantage of it can significantly boost your retirement savings. Let’s break down what 401(k) matching is, how it works, and how to maximize your contributions.

What is 401(k) Matching?

A 401(k) match is a contribution your employer makes to your retirement account, based on your own contributions. It’s essentially free money – a powerful incentive to save! Most employers offer a matching program, but the specifics vary.

How Does 401(k) Matching Work?

Here's a common example:

Employer Match: Let’s say your employer offers a 50% match on your contributions up to the first 6% of your salary.
Your Contribution: You decide to contribute 6% of your salary to your 401(k).
Employer Contribution: Your employer will then contribute 50% of those 6% – that's 3% of your salary.
Total: You've effectively saved 9% of your salary (6% from you + 3% from your employer).

Types of 401(k) Matches:

Basic Match: This is the most common type. It usually involves a percentage match on a specific portion of your contributions. (e.g., 50% match up to 6%)
Graded Match: The employer’s match percentage increases as your contribution percentage increases. For example, they might match 50% on the first 3% you contribute, then 60% on the next 3%, and so on.
Non-Matching: Some employers don’t offer a match. While less common, it’s still essential to contribute to take advantage of any potential benefits offered.

Key Considerations and Strategies

Understand Your Employer's Policy: The first step is to carefully review your 401(k) plan document or talk to your HR department. Pay close attention to:
- Match Percentage: What percentage does your employer match?
- Contribution Limit: What’s the maximum amount you can contribute?
- Eligibility Requirements: Are there any restrictions on when you can start contributing or taking distributions?
Start Small, Increase Gradually: You don’t need to contribute the maximum right away. Begin with a smaller percentage (e.g., 5% or 6%) and gradually increase it as your income grows.
Prioritize the Match: Always aim to contribute at least enough to receive the full employer match. Failing to do so is like leaving money on the table. It’s the lowest hanging fruit for increasing your retirement savings.
Consider Roth 401(k) Contributions: If you anticipate being in a higher tax bracket in retirement, a Roth 401(k) might be a good option. With a Roth 401(k), you contribute after-tax dollars, and your earnings and withdrawals are tax-free in retirement.
Review Annually: Your financial situation may change over time. Review your 401(k) contributions and investment strategy at least once a year to ensure you’re still on track to meet your retirement goals.

Resources:

Do you have any questions about your 401(k) or need help understanding your retirement savings?