An Employer 401(k) Match Is ‘Free Money.’ Here’s How to Maximize It

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If you’re an employee who receives a paycheck every month or two weeks, you could be leaving money on the table by not taking full advantage of your employer’s retirement matching.

In 2021, 68% of private industry workers had access to retirement benefits through their employer, according to the U.S Bureau of Labor Statistics. Many employers offer a match on contributions to incentivize saving for retirement and encourage employee retention as part of an overall benefits package. If you have access to a 401(k) plan with a company match, it’s a smart idea to save as much as you can toward your retirement. 

Pro Tip

If your employer offers a match, contribute enough to receive the full match. It’s free money that can add a big boost to your retirement savings over time.

Employer matching can happen in a couple of ways, and not every employer match is the same. Here’s what you should know about how it works. 

What Is Employer 401(k) Matching?

Employer 401(k) matching is a contribution your employer makes to your 401(k) retirement account. The contribution matches what you have taken out of your paycheck, usually up to a defined amount. A 401(k) is an employee-sponsored retirement account that employers offer to help their employees save and invest for retirement in a tax-advantaged way.

“The match is the money the employer contributes to the 401(k) account when the employee is also actively contributing,” says Kelly O’Donnell, executive vice president and head of workplace at Edelman Financial Engines, a financial planning firm. So in order to get the employer match, you need to contribute, too. 

How Matching Works

Each plan determines what your employer matches, and is typically a dollar-for-dollar amount up to a certain percentage. For example, if your annual salary is $50,000 and you send 5% of your check to your retirement account, you’d have $2,500 saved. If your employer matches your contributions up to 5%, then you’d have an additional $2,500 for a total of $5,000 per year.

Some employers offer a partial match that isn’t dollar-for-dollar or a lower percentage after a certain threshold. Meanwhile, some employers offer automatic contributions without a matching requirement (though this is less common). That’s why you’ll need to carefully read or discuss your plan options to determine how much you need to contribute to get the maximum match. 

Be sure to find out if there’s a vesting period, which means the employer match may not be fully yours until you’re employed for a certain amount of time, usually measured in years. For example, your company may have a plan in which contributions vest after a number of years (known as a cliff vest). Understanding the vesting schedule is important, because if you leave the company before you’re fully vested, you won’t get the employer match. 

In general, employers automatically contribute matches according to your regular paycheck salary. There are cases, however, when employers offer what’s known as deferred matching on a different schedule. 

Profit sharing is an example of a deferred match that happens outside of a regular schedule. Employers use this form of retirement matching most frequently to incentivize or reward the staff by adding a portion of annual profits to the employees’ retirement accounts. It’s similar to a bonus, only tax-deferred.

How to Know if Your Employer Matches 401(k)

Employers are required to give you a set of documents that explains any benefits offered, including the terms of the 401(k) and any included match. If you don’t have this paperwork, ask your company’s benefits coordinator or human resources (HR) department. Be sure to understand the exact terms of the match such as when it starts and how often it’s delivered to your account. 

Some employers also advertise their match rate on their job listings to attract new employees and retain current ones. Be aware that you might have to enroll once you begin working, or your HR department may automatically put you in your company’s 401(k) plan — and might have an automatic increase applied annually. 

“Many companies today create enrollment in 401(k) plans for new employees so they’re automatically contributing, but it’s critical to know how much you need to contribute beyond the automatic withdrawal to get the full match,” says Heather Winston, certified financial planner and director of financial planning and advice at Principal Financial Group

It’s also a good idea to understand your investment options, and what the defaults are for your account. If you can max out your 401(k), that’s a good thing, but be sure to contribute what works for your budget and overall financial goals

Should You Max Out Employer Matching?

“If your employer offers a match, you should definitely strive to contribute enough to take advantage of the full match. If you don’t, you’re leaving free money on the table,” says O’Donnell. “It adds up over time.” 

Even if you don’t want to max out your 401(k), getting the full employer match helps you save the most and take advantage of all the benefits available to you through your employer. It’s therefore a good idea to at least contribute enough to get whatever your company is willing to match. 

“It’s important to start small and start now because you can always increase the amount you save each year. Even a 1% increase will add up, especially if your company matches those contributions. That puts the power of compounding to work for you,” adds Winston. 

Does Matching Count Towards Contribution Limits?

“The short answer is no,” says Winston. But there’s a separate IRS rule that limits the amount of total contributions to a 401(k) from both the employee and employer combined. 

In 2022, most people can divert up to $20,500 per year to a 401(k) account—$1,000 higher than in 2021. If you’re age 50 or older by year-end, you can add an additional $6,500 in catch-up contributions. 

However, the overall limit from all sources is $61,000 in 2022. That means that no matter who contributes to your account, you can’t exceed that amount for the year. If your employer offers a match in the above scenario, the maximum amount you’d reach is $41,000. It’s therefore unlikely that you’ll exceed the overall contribution limit.

If your company’s 401(k) plan offers a match, try to contribute enough to capture the full amount. From there, you can assess whether you want to contribute above that amount toward your retirement fund.