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A 401(k) match is money your employer contributes to your 401(k) account. For each dollar you save in your 401(k), your employer wholly or partially matches your contribution, up to a certain percentage of your salary. Employer matching is a key job benefit that can significantly boost your 401(k) retirement savings over the long term.
What Are 401(k) Matching Contributions?
If your employer offers 401(k) matching contributions, that means they deposit money in your 401(k) account to match the contributions you make, up to a certain threshold. Depending on the terms of the 401(k) plan, an employer may choose to match your contributions dollar-for-dollar or offer a partial match. Some employers may also make non-matching 401(k) contributions.
Matching contributions aren’t required by law, and not all employers offer them as part of their 401(k) plans. But according to Katie Taylor, vice president of thought leadership at Fidelity Investments, a 401(k) match can be a core employee benefit that helps an organization retain talent and build strong teams.
“About 85% of the employers we work with offer some sort of matching contribution,” said Taylor. “The average employer contribution dollar amount into 401(k)s in 2019 was $4,100, which equates to a little bit more than $1,000 per quarter.”
Some 401(k) plans vest employer contributions over the course of several years. This means you must remain at the company for a set period of time before you fully take ownership of your employer’s matching contributions. Employers use vesting to incentivize employees to remain at the company. When you complete the schedule, you are said to be “fully vested.”
What Is a Partial 401(k) Match?
With a partial 401(k) match, an employer’s contribution is a fraction of an employee’s contribution, and the employer’s total contribution is capped as a percentage of the employee’s salary. According to Jean Young, a senior research associate with Vanguard Investment Strategy Group, partial matching is the most commonly used matching formula in Vanguard 401(k) plans.
“Matching structures vary by plan,” said Young. “In fact, we keep records on over 150 unique match formulas. But the most commonly offered match is $0.50 on the dollar, on the first 6% of pay. About one in five Vanguard plans provided this exact matching formula in 2018.”
Let’s say you earn $40,000 per year and contribute $2,400 to your 401(k)—6% of your salary. If your employer offers to match $0.50 of each dollar you contribute up to 6% of your pay, they would add $1,200 each year to your 401(k) account, boosting your total annual contributions to $3,600.
What Is a Dollar-For-Dollar 401(k) Match?
With a dollar-for-dollar 401(k) match, an employer’s contribution equals 100% of an employee’s contribution, and the employer’s total contribution is capped as a percentage of the employee’s salary.
“We commonly see employers offer a 3%, dollar-for-dollar match,” said Taylor. “They match 100% of your contributions up to 3% of your salary.”
Imagine you earn $60,000 a year and contribute $1,800 annually to your 401(k)—or 3% of your income. If your employer offers a dollar-for-dollar match up to 3% of your salary, they would add an amount equal to 100% of your 401(k) contributions, raising your total annual contributions to $3,600.
Non-Matching 401(k) Contributions
Non-matching contributions, also referred to as profit-sharing contributions, are made by employers regardless of whether an employee makes any contributions to their 401(k). Employers generally base how much they offer in non-matching contributions on factors such as the company’s annual profit or revenue growth.
Like other 401(k) matching arrangements, a non-matching contribution is capped at a percentage of an employees’ salary. According to Vanguard, 10% of its plan participants offer only non-matching contributions.
For example, an employer may give all employees non-matching contributions equal to 5% of their salary when certain business objectives are met. An employee who earned $30,000 a year would receive a $1,500 contribution to their 401(k) while an employee who made $200,000 would get $10,000.
Matching Contributions for a Roth 401(k)
If you choose to save money in a Roth 401(k), matching contributions must be allocated to a separate traditional 401(k) account. This is because IRS rules require you to pay regular income tax on employer contributions when they are withdrawn—and Roth 401(k) withdrawals aren’t taxed in all but a few cases.
Remember, with a traditional 401(k) account, your contributions are made pre-tax, and you pay regular income tax on withdrawals. And with a Roth 401(k) account, your contributions are made using after-tax dollars, and qualified withdrawals are generally tax free.
Annual Limits for an Employer’s 401(k) Match
The 2021 annual limit on employee elective deferrals—the maximum you can contribute to your 401(k) from your own salary—is $19,500. The 2022 elective deferral limit is $20,500. The 2021 annual limit for an employer’s 401(k) match plus elective deferrals is 100% of your annual compensation or $58,000, whichever is less. In 2022, this total rises to $61,000 or 100% of your compensation, whichever is less.
Considering that surveys suggest many Americans don’t have enough money saved for retirement, meeting or exceeding the amount needed to gain your employer’s full 401(k) matching contribution should be a key plank in your retirement savings strategy.
“Taking into account the power of compounding and a 6% annual rate of return, contributing enough to receive the full employer match could possibly be the difference between retiring at 60 versus 65,” said Young.
Use Fidelity’s 401(k) match calculator to find out how matching contributions can impact your retirement savings.
Vesting and Employer 401(k) Contributions
Some 401(k) plans include a vesting schedule for employer contributions. With vesting, you must wait for a period of time before taking ownership of the 401(k) contributions made by your employer.
Note that most 401(k) plans let you start contributing to your account as soon as you join the company. Contributions that you make to your 401(k) account are always considered fully vested—they are always 100% owned by you. Extended vesting periods only cover employer contributions.
According to Vanguard, 40% of 401(k) participants were in plans with immediate vesting of employer matching contributions. Smaller plans, meaning plans with fewer participants, used longer vesting schedules, with employees only becoming fully vested after five or six years.
If you have a 401(k) and your employer matches your contributions, be sure to ask about the vesting schedule. If your plan has a vesting schedule, you don’t own your employer’s contributions to your 401(k) until you are fully vested. If you take a new job before that point, you could lose some or even all of your employer’s 401(k) contributions.
Taxes and Employer 401(k) Matching Contributions
You don’t have to pay any income taxes on employer 401(k) matching contributions until you start making withdrawals.
“Gross income includes wages, salaries, bonuses, tips, sick pay and vacation pay. Your own 401(k) contributions are pre-tax, but still count as part of your gross pay. However, your employer’s matching contributions do not count as income,” said Joshua Zimmelman, president of Westwood Tax & Consulting.
Your employer’s matching contribution grows tax-deferred in a traditional 401(k), boosting your compounding returns over the years. “You don’t have to pay any taxes on the employer match until you start making withdrawals,” said Zimmelman. Traditional 401(k) withdrawals are taxed as ordinary income at whatever tax bracket you’re in when you make those withdrawals..
How to Maximize Your Employer 401(k) Match
If you have a 401(k), employer matching contributions provide a force multiplier for your retirement planning. Follow these tips to maximize your employer 401(k) match:
1. Start Making 401(k) Contributions Immediately
Some employers have a waiting period after you start a job before they begin matching your 401(k) contributions. However, Vanguard notes that 68% of plans let you start making contributions immediately as a new employee. Don’t wait for the matching contribution to kick in; start contributing when you begin your new job.
If you’re intimidated by the investment options, take advantage of the plan’s target-date funds. “The vast majority of employers have their default investments set up as a target-date fund, which is tied to your age and retirement year,” said Taylor. “You can put your money in there, and it’s a sort of do-it-for-me option where it’s allocated across equities appropriate for your age.”
2. Always Contribute Enough to Get the Full Match
If your employer offers matching 401(k) contributions, make sure you contribute enough to qualify for the full match. If you don’t, you’re basically losing out on free money. Talk to an HR representative or a plan administrator to find out how much you need to withhold from each paycheck to get the full match.
3. Sign Up for Automatic 401(k) Contributions
Enroll in automatic payroll deductions, so contributions are deposited in your 401(k) each pay period without any further action by you.
“One of the advantages of these plans is the power of payroll deduction,” said Young. “You pay yourself first, automatically, every paycheck, making retirement savings easy.”
Use Vanguard’s plan savings calculator to find out how a given level of contributions will impact your paycheck, and how much you could be earning for your retirement with an employer’s match.
4. Resist the Temptation to Tap your 401(k)
When you’re contributing funds to your 401(k) account month after month, there will be times when the market flags and you see the value of your investments steadily decline. You may face the urge to withdraw money from the market during downturns, it’s essential that you resist the temptation.
“Especially for young investors, it’s important to remind people to stay the course even when the market is volatile,” said Taylor. “People who are younger have time to ride out market swings.”