If your company provides a 401k plan, there's a high chance that they also offer employer matching. A study by the Plan Sponsor Council of America showed that 98% of companies that offer a 401k also provide employer matching for their employees.
In employer matched 401k plans, employers will contribute to an employee's 401k, up to a specified amount. You can think of it like a bonus on top of your salary.
How much employers contribute varies depending on the company, but usually ranges between 4% and 6% of salary. For example, if you contribute $10,000, they'll match your contributions up to $400 or $600.
Companies also having different vesting schedules (when you can access the money), and will either participate in partial matching or full dollar-for-dollar matching.
However it's structured, it's usually a good idea to take full advantage of your company 401k matches since it's basically free money.
Matching 401k contributions are additional contributions that your employer makes towards your 401k retirement plan. Many employees consider it as an extra bonus on top of their salaries.
If your company 401k plan has employer matching, your employer will match your 401k contributions up to a specific amount.
For example, let's say your company offers 401k employer matching up to 5% of your salary. If you make $100,000, the maximum your employer will contribute to your plan is $5,000.
The percentage is different for each company, and they may choose to structure matching contributions through partial matching, full matching, or non-matching contributions.
Let's take a look at each one.
With a partial match, employers will make matching contributions through a smaller percentage of what you contribute to the plan yourself. The most common partial match structure is 50% - up to a certain amount. So if you contribute $1, your employer will contribute $0.50.
For example, let's say your employer offers a 50% partial match, up to 6% of your salary. If you make $100,000 year at the company, the maximum your employer will contribute to your 401k is $6,000. Because they offer a 50% partial match, you'll need to contribute $12,000 (50% of $12,000 is $6,000) in order to receive the full employer match to your 401k.
Partial matches of 50% are the most common structure for 401k plans with employer matching.
With a full match, also known as a dollar-for-dollar match, employers will match your contributions dollar for dollar. If you contribute $1, your employer will contribute $1 as well.
Going with the same example, if you make $100,000 per year and your company offers a full employer match up to 6% of salary, you'll only need to contribute $6,000 to receive the full employer match to your 401k.
While less common than the first two, some companies will contribute to your 401k even if you don't contribute to it yourself. These are often called nonelective contributions.
Also read: How to find a lost 401k account
The average 401k employer match in 2022 is around 4% to 6% of salary.
According to a recent study by the US Bureau of Labor Statistics, 41% of companies that offer a 401k plan provide employer matching contributions up to 6% of employees' salaries. Only 10% of companies offer more than 6%, with the top employers offering up to 25%.
While this is a fair increase if you look all the way back to the 3.5% average in 2015, it hasn’t moved much since 2020. A study by Vanguard reported that the average employer match was 4.5% in 2020, with the median at 3% of salary.
In 2022, if you're getting at least 4% to 6% in 401k employer matching, it's considered a "good" 401k match. Anything above 6% would be considered "great".
In 2022, employees can contribute up to $20,500 into their 401k accounts. If you're at least 50 years old, you're given an extra $6,500 in catch-up contributions, and your limit is $27,000.
Employer contributions don't count towards this limit, but instead towards the overall 401k contribution limit, which is $61,000 for 2022 ($67,500 if you're over 50).
As long as you're employed by a company that offers a 401k plan with employer matching, you'll be eligible to participate.
Most companies will start offering employer match contributions as soon as you start your employment. However, some companies require that you work for a specific period of time in order to become eligible.
Vanguard's 2020 study showed that 20% of employers required employees to work at least a year at the company before they could start receiving matching contributions to their solo 401k.
Vesting is the time period required in order for the employer matched funds to become fully yours. Vesting periods are often used to provide an incentive for employees to stay with the company longer.
Every company has different vesting schedules for their employer match contributions, and it can range anywhere between immediate to six years. If you depart the company before your employer match becomes fully vested, you'll only be eligible to take a partial amount calculated by the time you worked there.
For example, let's say your company contributed a total of $4,000 to your 401k, with a four-year vesting period. If you left the company after two years, you would only be eligible for 50% of the $4,000 contributed to your account. You would have to forfeit the remaining $2,000 if you wish to depart your employer.
Not all companies have long vesting periods, and many employers offer immediate vesting. According to a study by Plan Sponsor Council of America, around 41% of 401k plans offer immediate vesting of employer matched contributions.
A 401k has two different accounts: A traditional pre-tax 401k and a Roth 401k. With a traditional 401k, you contribute to your account with pre-tax dollars, receive a tax deduction, but you pay taxes when you take qualified distributions in retirement. With a Roth 401k, you contribute to your account with after-tax dollars. You pay taxes now, but withdrawals in retirement are completely tax-free.
Not all companies offer a Roth 401k account. If they do, your Roth contributions are still eligible for employer matching. However, employers are not allowed to contribute to a Roth account and matched contributions will go into your traditional 401k account.
Employer matched contributions to your 401k is the closest thing to free money at your company. If your company offers employer matching, it's a good idea to contribute at least enough to receive the maximum allowed per year. Employer matching amounts and structures differ with each company, with the most common being a 50% partial match up to 6% of salary.
The best company 401k plans will offer immediate eligibility with no vesting period required. However, some companies require new employees to work at least a year to start receiving employer matched contributions. Depending on the vesting schedule decided by the employer, they may also have to wait up to six years to fully own the employer contributions in their 401k accounts.
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