Are you taking full advantage of your employer’s 401(k) match? If you’re not sure what it is or how it works, this article is for you. A 401(k) match is like free money that your employer contributes to your retirement savings account. It’s important to understand the details and make the most of this benefit to boost your retirement savings.
How Does Matching Work?
When a company offers a 401(k) retirement plan to its employees, they may also offer a matching contribution. This is in addition to the amount employees contribute from their own salary each pay period. These matching contributions are made by the employer directly to your account, and they help enhance your retirement savings efforts.
The specific terms of the 401(k) match can vary, but it must adhere to the rules set forth by the Department of Labor. Matching contributions can be made each pay period, at varying intervals, or once per year, depending on the plan. Whether you can take the matching contributions with you when you leave the company depends on whether you are vested in those contributions.
Types of Matching Contributions
There are a few different types of 401(k) matching contribution formulas that employers may use. Here are some common ones:
Partial 401(k) Match
This formula involves an employer matching a percentage of an employee’s contributions, usually up to a certain limit. For example, a common formula is a 50% match on the first 6% of an employee’s salary contributed. The maximum match an employee can receive under this formula is calculated based on their salary and contribution percentage.
Dollar-for-Dollar 401(k) Match
With this formula, the employer matches employee salary deferral contributions in full up to a set limit. For example, if the employer matches dollar-for-dollar up to 4% of an employee’s salary, they will match each dollar of employee contributions up to that amount. However, the employer’s match will be capped at the set limit, even if the employee contributes more.
Profit Sharing and Nonelective Contributions
Profit-sharing contributions are made by employers to all eligible employees, regardless of their 401(k) participation or contribution amounts. These contributions are typically based on the company’s performance. Nonelective contributions are similar but made to correct discrepancies in nondiscrimination testing or as part of a Safe Harbor 401(k) plan.
Roth 401(k) Employer Match
Thanks to recent legislation, employers can now make matching contributions to a participant’s Roth 401(k) account. However, not all plans may have implemented this yet.
Annual Limits for Employer’s Match
Each year, there is a combined maximum level of employee and employer contributions that can be made on behalf of each employee. For 2023, the maximum combined contribution level is $66,000 ($73,500 for employees who are 50 or over). The first part of this limit is the employee deferral limit, and the remainder can consist of employer matching contributions and non-matching contributions like profit sharing.
401(k) Vesting Schedule
The vesting schedule in your employer’s 401(k) plan determines your ownership of employer matching contributions over time. You are always fully vested in your own contributions, but the vesting rules for employer contributions may vary. Graded vesting and cliff vesting are two common types, with different timelines for full vesting.
Taxes on Employer 401(k) Matching Contributions
The tax treatment of employer matching contributions depends on whether they are made to a traditional or Roth 401(k) account. If made to a traditional account, they will be taxed when withdrawn. However, if rolled over to a traditional IRA or another employer’s 401(k) plan, they will not be taxed until withdrawal. Contributions to a Roth 401(k) account are made on an after-tax basis and can be withdrawn tax-free if certain requirements are met.
Tips to Maximize Your Employer 401(k) Match
To make the most of your employer’s 401(k) match, consider these tips:
- Start contributing as soon as you are eligible.
- Contribute enough to earn the full match.
- Contribute beyond the default level if possible.
- Sign up for automatic contributions.
Don’t miss out on your 401(k) “free” matching money. Take advantage of this benefit and boost your retirement savings. Remember, the more you contribute and the sooner you start, the better off you’ll be in the long run.