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You probably know that 401(k) accounts are how your employer helps you save for retirement, but did you know that many employers match your 401(k) contributions? Taking advantage of 401(k) matching is one of the best ways to boost your retirement savings. After all, it’s free money.
Unfortunately, most 20-somethings in America aren’t even meeting the $19,000 401(k) contribution limit for 2019, averaging only about $11,800 in contributions, according to a study from CNBC and Fidelity. Around 42% of Americans aged 18 to 29 don’t have any retirement savings to begin with, the study found.
If you find that you’re not meeting your contribution limits, read on to get a handle on how 401(k) matching works and why it’s something you should be taking full advantage of. We’ll explore some real-world situations and get some tips and tricks from experts. Be sure to also check out our complete guide to maximizing your 401(k).
How does 401(k) matching work?
For the uninitiated, 401(k) matching is when your employer makes contributions to your 401(k). Your employer puts money into your 401(k) along with you — “matching” your contribution — up to a certain amount, and with certain conditions.
There are two main employer approaches to 401(k) matching: partial matching and dollar-for-dollar matching. In addition, you need to be aware of 401(k) vesting.
Partial 401(k) matching
Partial 401(k) matching is a common employer strategy. Much like it sounds, this is when employers match a portion of an employee’s contribution, rather than matching it 100%.
For example, your company could choose to match 50% of your contributions up to 6% of your salary. So if you contribute 4% of your salary, they’ll contribute 2%. To maximize your employer’s policy, you’d have to contribute 12% of your salary to your 401(k) to get them to contribute their max 6%. Another partial match example may look like a 100% match for the first 3% and a 50% match on your contributions above 3%, up to 5% of your salary.
Dollar-for-dollar 401(k) matching
A dollar-for-dollar 401(k) match is when your employer elects to match 100% of your own contribution. So if you contribute 3%, they’ll also contribute 3%. However, there’s still usually a limit to how much they’ll match. Let’s say your employer match maxes out at 5%. To get as much out of their policy as you can, you’ll want to contribute 5%. If you contribute any more, any excess above 5% won’t be matched.
401(k) employer match vesting
When you’re checking out your employer’s match policy, look for any mention of vesting. If there is a vesting schedule, that means your employer’s contributions aren’t yours immediately. Instead, you have to wait anywhere between one and three years for the money to be yours.
For example, an employer could allow you access to 33% of your match contributions after you’ve been at the company for a year, another 66% after two years and then the full 100% after your three-year mark. Some companies might even make you wait for three years for 100% vesting. It’s important to check your company’s vesting schedule early on.
No matter what steps you take to maximize your employer’s 401(k) matching, it could go down the drain if you don’t double check that vesting schedule. Be proactive and always look for any vesting policies. If you don’t, you could end up losing your match.
Always ask about your employer’s 401(k) matching policies
Not all employers offer 401(k) matching. Even if they do, employers aren’t always upfront about what they match. That was certainly the case for Robin, a pollster in Washington D.C. “When I began working at a startup company, there was no employer-match program,” she said. “However, I later found out that a program had been put in place that I had not been aware of.”
Only after we reached out to Robin, who declined to give her last name for this article, about her experiences with 401(k) matching did she find out about her company’s new matching system. “This policy was not made clear to me when it was rolled out, and I’m unsure how it was communicated to existing employees,” she said.
Be sure to ask about your company’s 401(k) policies upfront. If Robin’s situation is any indication, it may also help to periodically check in on those policies, as they may have changed. It’s important to educate yourself on what 401(k) matching looks like and what to look out for.
Expert tips and tricks for 401(k) matching
Sometimes it takes an expert’s opinion to jolt you into action. You may already know that you should be contributing to your 401(k) and using that employer match. But take it from these financial experts, it’s pretty easy to change your behaviors and keep from missing out on such a big reward.
Do not assume you don’t make enough money to contribute to your 401(k)
“Many times, individuals overestimate the impact that setting a 401K deferral rate will have on their tax home pay,” says Edward P. Schmitzer, CPA/PFS, CFP® and President of RCA Wealth.
Schmitzer suggests running some numbers to see the actual impact a 401(k) contribution might have on your net take-home pay. You can even chat with your payroll manager to help you. That way, you can compare your current paychecks to what they could look like. “People are often surprised on how little their net goes down due to the tax savings of a deferral to the 401(k),” said Schmitzer.
Find out how often your employer 401(k) match is paid
“This is one of my best tips” said Liz Gillette CFP® at MainStreet Financial Planning, Inc. Many employers match on a paycheck-by-paycheck basis. So if their cap is set at 4%, that means they’ll only match up to a maximum of 4% of each paycheck.
“When an eager saver changes their contribution rate, and perhaps adds a larger than usual payment, they are often leaving money on the table,” she said.
For 2019, you’re allowed to contribute a maximum of $19,000 into your 401(k). If you set up your elections so that you meet that maximum before the end of the year, you’re missing out on employer match for the rest of the year’s paychecks.
Take this example from Robert J Falcon, CFP®, CPA/PFS, MBA at Falcon Wealth Managers, LLC. An employee making $190,000 sets up a 10% 401(k) contribution rate, hoping to defer the max of $19,000 for the year. Let’s say that employee gets a promotion and a 10% raise on January 1, but does not reset their contribution rate.
Since the company is matching max 4% per paycheck, in the new year, the employee will reach their $19,000 contribution max in November, missing out on a complete match that month, and they won’t receive any company match in December.
The employee could have maximized the employer match by reducing their contribution rate to 9%. That way, they would still come very close to the $19,000 contribution limit in December while also snagging the match throughout the full year as well.
What to do if you can’t afford your 401(k) employer match
Start by putting as much into the 401(k) as you can afford, regardless of getting a full match or just a partial match, suggests Schmitzer of RCA Wealth. With each raise you receive, increase the savings rate 1% to 3% at the same time that the raise takes effect.
According to Mark Wilson, APA, CFP® and President at MILE Wealth Management LLC, making 401(k) getting even a partial matching contribution is one of the few no-brainers of investing.
“Change your 401(k) contribution amount to 3% or 5% and commit to this for three months,” said Wilson. From his experience, few people ever notice the difference. “Most will be surprised at how easy it is to start accumulating. Free money and early compounding make a big difference.”
If you have a dual income household and share finances with your partner, you’ve got room to maneuver. Christopher R. Wells, CFP® and founder of Flourish Financial Planning, starts by figuring out which spouse’s plan has a better match. “I maximize that contribution,” said Wells.
For example, let’s say your company matches 25% of your contributions, but your spouse gets a 100% match. In that case, reduce contributions to your plan and maximize contributions to your spouse’s plan.
The 401(k) takeaway
No matter your situation, there are ways you can take advantage of your employer’s 401(k) matching. It’s an easy way to boost your retirement savings without much more effort on your part. Be sure to ask questions and clear up any confusion at the start. That way, you know just what kind of vesting schedule and limits there might be. Even if there is no match, you’ll know sooner, rather than later, that you’ll need to start up your retirement savings elsewhere.