How do 401k matches work

This is done so employees will put more in their accounts. This strategy is called "stretching the match. Vanguard's Center for Investor Research reports that stretching the match does not lead to higher contribution rates or greater employee participation. You might have to work for your employer for a certain period of time before the company will begin matching the amount you put in. Some companies make you wait a while—perhaps three or six months or a year—before you can put money into your k plan.

Here is an example of how that might work:. Here is an example in which the employer is more helpful in terms of the amount of its match but a little less so in the portion of your salary it's willing to match:.

Some employers will pay their match no matter how many paychecks it takes for you to reach your allowed amount for the year. But many companies will make a contribution only during the pay periods when k money is taken from your paycheck.

You can avoid leaving employer money on the table by putting in smaller amounts each pay period. That way, your employer will put money into your account in every period. Let's say you're paid twice a month, and your employer will only add money into your k when you do. Your plan manager can help you manage your k account to make the most of your employer match. You can also use an online calculator to figure out how much you should put in from each paycheck.

The money you add to your k plan is yours to keep, no matter when you leave your job. However, the amount of money put in by your employer will likely be subject to a vesting schedule. If you're close to becoming fully vested in your k , you might want to hold off on that job search for a few more months.

You stand to gain quite a bit more in your k by waiting until you are fully vested before you leave. With vesting, you'll have to work for the company for a certain period of time before you can take your employer's funding with you when you leave your job. When you have full vesting, that means that all the money your employer put into your k is yours to keep, even if you leave your job before you retire. The purpose of an employer match is to get employees to contribute to their k plans.

The flip side, though, is that this means over one-third of plan participants are not contributing enough to maximize the money they could be getting from their employers.

Find out what the maximum employer match on your plan is, and make sure you contribute enough to qualify for that match. Beyond that, though, there would most likely still be tax advantages and retirement saving benefits to be had by contributing more than you need to qualify for the full employer match.

Chances are this is well above what you need to contribute to maximize your employer match, but your goal should be to come as close to this limit as possible. Doing so will enhance your tax savings and build your retirement nest egg more quickly — and your employer match should help as well. If you reach the IRS maximum for k contributions, there are still other ways — from health savings accounts to after-tax savings — that you can build a bigger nest egg.

The employer contribution is based on a percentage of your contribution, and these matches are often capped meaning that they only apply up to a certain amount of your salary. Starting your career? How to start a retirement fund in your 20s. Health or wealth: juggling HSA and k contributions. How to use a health savings account to build retirement wealth. Regardless of the matching structure, your employer will likely cap your match at a certain percentage of your income.

Companies often impose a vesting schedule that determines when you get to keep employer-contributed funds if you leave the company. Immediate vesting means you get to keep all your employer's contributions to your k as soon as you earn them, but this is rare. It's more common to see cliff vesting, whereby you forfeit all your employer-matched funds if you leave the company before you've worked there a certain number of years.

Every company has its own matching methodology and vesting schedule, so talk to your employer if you're not sure how your k match works. Most people don't have to worry about running into these contribution limits , but high earners should be mindful of them. The government taxes contributions over the annual limit once in the year you make the contribution and again when you withdraw the funds in retirement.

Stay aware of how close you are to the annual limits and withdraw any excess contributions before the tax deadline to avoid the double taxation. If you find yourself at the annual k contribution limit for the year and you'd still like to set aside more money for retirement, you can always open an IRA and put some money there as well. A company k match is a great supplement to your personal contributions, but you need to understand how yours works in order to get the most out of it.

Along with the contribution limits and match percentages, there is another important catch when it comes to k matches: the vesting schedule. Vested just means that you fully own the employer contributions to your k. You always own the contributions you put into the account — but if you leave a company early, you might not get to take the money your employer put in.

This amount is known as your vested balance. Get Started Log in. Get Started. Read More. October 10, Key takeaways.