How does 401(k) matching work?

Investing into your 401(k) is one of the most reliable methods for funding your retirement so you can live out your retirement years in comfort. Many employers offer 401(k) matching benefits as an incentive for their employees. If your employer offers matching, you might be wondering how it works and how you can get the most out of it.

Matching for a 401(k) involves any contribution your employer is willing to put into your 401(k) plan every year based on a percentage of your own contribution.

Think of 401(k) matching as two people pouring water into one glass. You can only pour so much on your own without spilling the pitcher, but your employer can use a second pitcher to help you fill up the glass faster. 

Common 401(k) matching options

Employers have virtually limitless options for how they choose to match 401(k) plans. Usually, employer contribution matching falls under one of these two categories:

• Partial match contributions — With a partial match contribution, your employer matches a percentage of what you contribute. The most common contribution amount by employers is 50% of your contribution up to a certain amount.
  
  • Example of a partial contribution: The employer offers a 401(k) plan in which they will match 50% of your contribution, up to 10% of your salary. This means that if you contribute 10% of your salary toward your 401(k), your employer will contribute  5%. If you contribute more than 10%, your employer still only matches up to the maximum of 50% of the initial 10%. If you contribute less than 10%, say 3%, your employer will contribute 1.5% (50% of 3%).
    
• Full match contributions — With this plan, also known as a dollar-for-dollar match, your employer contributes the same amount as you do up to a certain percentage.
  
  • Example of a full contribution: The employer offers a full match contribution plan to match 100% of your contributions to a maximum of 5%. This means that if you contribute 5% of your salary to your 401(k), your employer will too, making a total of 10%. If you contribute more than 5%, your employer will continue to contribute 100% only to the initial 5% of your contribution. But under this scenario, if you contribute less than 5%, again we’ll use 3%, your employer will contribute 3% (100% of your 3% contribution). 

401(k) contribution limits

Each year, the IRS sets a maximum limit on how much you can contribute to your 401(k) for the year. In 2020, the IRS set the contribution maximum at $19,500 dollars. You can contribute an additional $6,500 dollars on top of this as an annual catch-up contribution if you are age 50 or over.

Your employer’s contribution does not count toward your maximum contribution limit. So, if you contribute your full limit of $19,500 dollars this year, your employer’s match acts essentially as a bonus amount on top of this. 

You should always try and contribute the amount of your employer’s full match

When you fail to contribute at least the maximum percentage of what your employer is willing to contribute, you are basically leaving free money behind. So, if you are not financially able to contribute the recommended 10 to 20% of your paycheck, you should at least contribute whatever your employer is willing to match, so that you can receive as much as possible into your 401(k) account.

Get the most out of your 401(k) with the assistance of a ProVise financial advisor

It is difficult to navigate the financial landscape and make smart investment choices when you do not have the time or training for it. Fortunately, there are CERTIFIED FINANCIAL PLANNER™ professionals like the team at ProVise Management Group who can help.

At ProVise, our team can work closely with you to assess your current financial circumstances and create a personalized retirement plan that aligns with your goals and values. We will provide your personalized plan for you at a fiduciary standard, offering an unconditional money-back guarantee if you are unsatisfied with your written plan. All you need to do is simply return it to us and we will refund 100% of the fee paid. 

Are you ready to get your retirement planning on the right track with the assistance of a ProVise financial advisor? Contact our team today to schedule a consultation.