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SmartAsset: How Does 401(k) Matching Work?

One of the easiest ways to save for retirement is to contribute to your 401(k). Set up through your employer, a 401(k) allows you to set aside a certain amount of each paycheck before income taxes apply. Sometimes, your employer can also contribute to your 401(k) through an employer match program. This program can significantly boost your retirement savings, and if your employer offers matching, there’s very little extra work you need to do to snag this perk.

Consider working with a financial advisor as you develop or modify your retirement savings plan.

How Does 401(k) Match Work?

It’s important to note that employer matching usually doesn’t mean that your employer will match 100% of your contributions. Rather, your employer typically has a cap to how much they’ll contribute. This amount can be expressed as a dollar amount, a percentage of your salary or a percentage of your own contribution. Your contributions could be capped at 6% of your salary, for example.

One way your employer could contribute to your 401(k) is by matching 100% of your contribution up to the cap. If we stick to the original example above, your employer match will max out at 6%. So if you, for example, contribute 5% of your salary to your 401(k), your employer will contribute the same amount.

As employer matching is effectively free money, most experts will tell you to make sure you contribute enough to max out the match. In this instance, that means contributing at least 6% to take full advantage of your employer’s match program. However, you should only increase your contribution if you’re safely able to do so without hurting your current financial situation.

Of course, not all employers will match your contribution dollar for dollar. Some may “match,” say, 25% of your contribution. If you contribute that same 5% of your salary, your employer will only be contributing 1.25% of your salary to your 401(k). Here, too, there’s likely to be a cap on contributions.

Check out the table below for to see what your 401(k) match contributions could look like based on a $40,000 salary.

Employer Match with a $40,000 Salary (Example)
Employer Match Plan Employer Match Maximum Your Contribution Employer Match Contribution Contribution Needed to Meet Employer Match Maximum
100% 6% of Salary ($2,400) $1,200 $1,200 $2,400
50% 6% of Salary ($2,400) $1,200 $600 $4,800
25% 6% of Salary ($2,400) $1,200 $300 $9,600

Do I Qualify for 401(k) Employer Match?

SmartAsset: How Does 401k match Work

Your eligibility for employer 401(k) matching depends entirely on your employer. Not all employers offer a match program. According to statistics from the Bureau of Labor Statistics in 2015 (the most recent statistics available) around 51% of companies with a 401(k) offer some sort of match.

It’s important not to assume your employer has automatically enrolled you for contribution matches. Be sure to ask when your matches will take effect. If you’re unsure whether your employer offers a match program at all, don’t be afraid to ask your boss or human resources representative about the company policy. Be sure to ask about the guaranteed match amount and what the match limits are.

Some firms may also have a vesting period for their contributions. This means that while the company may match 5% of your contributions, those contributions aren’t permanently yours until you’ve been at the company for a predetermined amount of time. If you leave before that time is up, you lose that money from your account.

Vesting schedules vary. Some companies have no vesting period, meaning all matching contributions are yours right away. Others have a vesting cliff at which point all of your matching contributions become permanently yours. Others have a schedule where a certain amount of your vested matches — say 20% — become permanently yours each year.

401(k) Matching Average and Contribution Limits

On average, companies that offer matching will match up to around 3% of an individual employee’s pay.

Regardless of your employer’s match, however, you should still do your best to contribute some of your pay to your 401(k). Not only will that lower your tax liability, it will give you a source of income once you hit retirement. Experts recommend saving between 10% and 20% of your gross salary toward retirement. The total amount can be split between your 401(k) and other retirement accounts you may have, or you might keep all of that in your 401(k). Be sure to keep yourself on track throughout the work years, checking whether you’re meeting your age group’s average 401(k) contribution numbers or not.

Also always keep in mind that the IRS does put limits on how much you can contribute to your 401(k) each year. For 2022, you’re allowed to contribute a maximum of $20,500, up from the 2021 limit of $19,500. If you’re 50 or older, you can contribute an additional $6,000 a year. However, your employer’s match does not count toward that 401(k) limit. The combination of contributions from all sources can reach up to $64,500 for 2021 and $67,500 for 2022.

Bottom Line

SmartAsset: How Does 401k match Work

Employer 401(k) matching is essentially free money that you can easily benefit from. There are typically no extra hoops you need to jump through to qualify. Be sure to check with your company to see whether it offers a match. Also see whether you need to enroll manually,how much you need to contribute to max out the match and what kind of vesting schedule applies. Employer matching can provide a great boost to your retirement savings, so make sure you’re informed on the details and taking full advantage.

Tips on Saving for Retirement

  • If navigating 401(k) rules and other retirement topics sounds complicated, a financial advisor can help guide you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • To branch out a bit more in your retirement savings, you can open an IRA. An IRA, or individual retirement account, isn’t sponsored by your employer. You have to open and fund it entirely yourself, but the upside is that you have more investment options. Of course, you can get an advisor to manage your accounts for you, as well.

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Lauren Perez, CEPF® Lauren Perez writes on a variety of personal finance topics for SmartAsset, with a special expertise in savings, banking and credit cards. She is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Lauren has a degree in English from the University of Rochester where she focused on Language, Media and Communications. She is originally from Los Angeles. While prone to the occasional shopping spree, Lauren has been aware of the importance of money management and savings since she was young. Lauren loves being able to make credit card and retirement account recommendations to friends and family based on the hours of research she completes at SmartAsset.
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