Your 401(k) Employer Match and How It Works

Key Points – Your 401(k) Employer Match and How It Works

Understanding How a 401(k) Employer Match Works
Examples of 401(k) Employer Contributions
Is Contributing Enough to Your 401(k) to Get an Employer Match a No-Brainer?
The Roth 401(k) Employer Match
4-Minute Read

Making the Most of Your 401(k)

Bud Kasper, CFP®, AIF®, and Chris Rett, CFP®, AIF®, shared on America’s Wealth Management Show that 401(k) savings are on the rise in 2024. Have you played a role in that trend? In 2024, you have the opportunity to contribute up to $30,500 to your workplace retirement plan if you’re 50 or older and make a full catch-up contribution. Contributing to your 401(k) allows you to invest in your financial future. Your employer can play a big role in that as well by offering a 401(k) employer match. Let’s dive into how a 401(k) employer match works.

Free Money from Your Employer?

According to Fidelity, more than 85% of 401(k) plans that have Fidelity as a service provider offer some form of employer contribution.₁ There are various ways that an employer can structure a 401(k) match. We’ll review a few examples momentarily. Along with 401(k) matches (or instead of), your workplace may elect to make profit-sharing or non-matching 401(k) contributions. No matter the form of contribution, think of it as free money from your employer to reward you for saving for retirement.

Examples of 401(k) Employer Contributions

Typically, an employer puts in a dollar or a fraction of a dollar for every dollar that the employee contributes to their 401(k) plan up to a certain percentage of your salary. For example, if your employer offers a 50% match, they’ll contribute 50 cents for every dollar you contribute to your 401(k). A dollar-for-dollar contribution from your employer would then be a 100% match.

Let’s say that you’re contributing 6% of your salary to your 401(k) plan. Your employer could make a dollar-for-dollar match, a partial match, or a combination of the two. Here’s one way a combination of the two matches could work with your 6% contribution. Your employer could make a full match on the first 3% of your contribution and then a partial match on the other 3%. If that partial match is a 50% match, the total employer match on your 6% contribution would be 4.5%.

Should You Always Meet Your Employer’s 401(k) Match?

If your employer offers a full 401(k) match, should you always contribute the full amount your employer matches? We can’t emphatically say yes because we need to know more about your unique situation. Maybe you have urgent expenses that currently prevent you from contributing enough to your 401(k) to get a full match. If that’s the case, make sure you create a spending plan so you can still contribute as much as possible and potentially get the full match down the road.

Instant Gratification vs. Delayed Gratification

It takes discipline to save for retirement. Do you prioritize instant gratification (spending your paycheck as soon as possible) or delayed gratification (setting money from your paycheck aside and putting it in a workplace retirement plan to save for retirement)? There can be benefits of instant gratification in that scenario, but are they worth putting off your retirement? As you start planning for retirement, you’ll likely see that retirement planning is full of potential trade-offs, especially when it comes to saving vs. spending.

Contribution Limits

We mentioned in the opening paragraph that people who are 50 and older can contribute up to $30,500 to their 401(k) in 2024. Let’s explain why that’s the case. The IRS sets annual contribution limits for retirement accounts. For 2024, the maximum 401(k) contribution you can make is $23,000.

However, those who are 50 and older are eligible to make annual catch-up contributions. A full catch-up contribution for 2024 is $7,500. So, if you’re 50 or older and make a maximum 401(k) contribution—including a full catch-up—it would be $30,500 in 2024.

Now look at Figure 1, below. When you add up the combined pre-tax and Roth contribution total, after-tax contributions, and employer matching contributions, the most that someone under 50 can contribute to their 401(k) in 2024 is $69,000. That total increases to $76,500 for people who are 50 or older that make a full $7,500 catch-up contribution.

FIGURE 1 – Types of 401(k) Contributions

Roth Employer Contributions

A new feature that was added with SECURE Act 2.0 is the ability to elect that the contributions you receive from your employer are deposited into a Roth source. However, the matching employer contribution will be taxable to you in the year that it was deposited to your retirement account. Most retirement plan record keepers are still updating their systems to allow this feature. When available, your company retirement plan would need to be amended to permit Roth employer contributions for you to elect this option.

Vesting Schedules

Along with understanding how your employer’s 401(k) match works, it’s important to be aware of your 401(k) vesting schedule. Vesting works in a couple of different ways. Some employers require their employees to attain a certain period of service before they can get a full 401(k) match. That is referred to as cliff vesting. There’s also graded vesting, which occurs gradually over time—typically between three and six years.₂ For example, let’s say your employer’s vesting schedule is set up over five years. You might be 0% vested during your first year of employment but would be vested 25% each year after that to be fully vested by your fifth year of service.

Do You Have Any Questions About Your 401(k) Employer Match and How It Works?

If you have questions about your employer’s 401(k) match or your 401(k) in general, we encourage you download our 401(k) Survival Guide.

401(k) Survival Guide

At Modern Wealth, we also have a company retirement plan team that’s an integral part of our overall team. They’re well-versed in explaining the nuances of 401(k)s, but other workplace retirement plans as well, such as 403(b)s and 457(b)s. Start a conversation with our team today to discuss whatever questions you may have about your workplace retirement plan. We look forward to talking to you soon about how to align your assets with your goals.

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Resources Mentioned in This Article

Downloads

Other Sources

[1] https://www.fidelity.com/learning-center/smart-money/average-401k-match

[2] https://www.investopedia.com/401-k-vesting-rules-5323652

Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.