How to Make the Most of Your 401(k) Employer Match

June 24, 2024

Let’s be honest – thinking about retirement can feel… distant. It's easy to put off saving, especially when you’re juggling bills and other expenses. But there’s one thing you shouldn’t ignore: your employer's 401(k) match. It's essentially free money, and not contributing enough is like turning down a significant boost to your retirement savings.

What is a 401(k) Employer Match?

Most employers offer a 401(k) plan, which is a retirement savings plan. A key component is the “match,” often referred to as the “employer contribution.” Here's how it generally works:

You Contribute: You decide how much you want to contribute from each paycheck – usually a percentage of your salary.
Employer Matches: Your employer then matches a portion of that contribution. For example, they might match 50% of your contributions up to 6% of your salary.
It’s Free Money! The beauty of a match is that it’s not something you have to pay for. Your employer is putting money in your account based on your contributions.

Example:

Let’s say you contribute 6% of your salary to your 401(k). If your employer offers a 100% match on the first 6% you contribute, you’ll receive an extra 6% in your account, completely free.

Why You Need to Contribute Enough to Get the Full Match

This is where many people stumble. Let’s look at a common scenario:

You earn $60,000 per year.
Your employer matches 50% of your contributions up to 6% of your salary.
**If you contribute only 6% ( $3,600),** you’ll receive a$ 1,800 employer match – a fantastic boost!
**If you contribute only 3% ( $1,800),** you’ll only receive a$ 900 employer match. You’re leaving $900 on the table.

Important Considerations:

Understand the Match Details: Carefully review your 401(k) plan documents to understand the specific matching formula. Some plans have vesting schedules, meaning you might need to work a certain period of time to fully own the employer contributions.
Start Early: The earlier you start contributing, the more time your money has to grow through the power of compounding.
Increase Your Contributions Over Time: As your income increases, aim to contribute more to take full advantage of the match. Even small increases can make a big difference over the long term.
Consider Roth 401(k) Options: Some 401(k) plans offer Roth 401(k) options, where you pay taxes on your contributions now and withdrawals are tax-free in retirement.

Don’t let your employer’s match go to waste! It's a crucial element of building a secure financial future.