Contributing to a 401(k) plan is one of the best things you can do when planning for your retirement. This is because your employer may match the amount you put into your account. If you work at a place that offers a matching benefit for a 401(k) plan, when you put money from your paycheck into your 401(k), your employer also contributes money to the account.
Match extension
Some employers offer a 100% matching benefit, while others do not match what an employee contributes to the 401(k) plan at all. Some might offer a 50% match or a partial match on your contributions.
Some plans may offer a lower match on a higher percentage of your salary. For example, the company may match 50% of the first 8% of your salary instead of matching 100% of the first 4% of your salary. This is done to encourage employees to save more in their accounts. This strategy is called “match extension.”
Even though the employer may try to encourage you to save more by offering a partial match, a study by Vanguard found that 401(k) savings and plan participation rates actually decrease.
Examples of employer matching
Your employer may decide to match 6% of your contributions to the 401(k) plan. When you contribute 6% or less of your annual pre-tax income to your plan, your employer will match your contributions. You may receive a full or partial match.
Partial match on the first 6%
Partial matches are often 50% of what you contribute. In this case, the employer will put 50 cents into your 401(k) for every dollar you contribute, up to 6% of your total salary for that year. This means the employer will only match 3% of your salary, but you must contribute 6% of your salary to receive the full match.
For example, if you earn $50,000 a year and contribute at least 6% of your salary to your plan, you will receive an employer match of $1,500 for that year. This is because 6% of $50,000 is $3,000, and the employer will contribute half of that amount, which is $1,500.
When you add that amount to what you contribute, you will have a total of $4,500 going into your 401(k) for the year – but you will only take $3,000 from your salary.
This means you will contribute $250 per month, and you will receive an additional $125 per month from your employer, bringing the total to $375.
Dollar-for-dollar match up to 5%
Your employer may match dollar-for-dollar for every dollar you contribute to your 401(k) plan, up to a total of 5% of your pre-tax salary for the year. If you earn $50,000 and contribute 5% to the plan, this means you contributed $2,500. Then, the employer will match 100% – also $2,500. You will have a total of $5,000 for the year.
Both you and your employer will contribute over $208 per month. Your contributions will double as a result. If you are trying to decide between two jobs and are considering how much each will match when you contribute to your 401(k), be sure to find out if it’s a partial or full match, as it can make a big difference.
Contribution limits
The Internal Revenue Service (IRS) has set annual contribution limits for 401(k) plans. The contribution limits for 2022 and 2023 are as follows:
– For 2022, you can contribute up to $20,500 of pre-tax income to a 401(k) plan. If you are age 50 or older, you can contribute an additional $6,500 in what are called “catch-up contributions.”
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For 2023, you can contribute up to $22,500 of pre-tax income to a 401(k) plan. If you are 50 years old or older, you can contribute an additional $7,500 in catch-up contributions.
The total amount of money that can be added to your 401(k) account by you and your employer cannot exceed the lesser of:
– For 2022: $61,000 ($67,500 including catch-up contributions).
– For 2023: $66,000 ($73,500 including catch-up contributions).
The total amount contributed must be less than 100% of your pay.
Vesting Schedule
The money you add to a 401(k) plan is yours, no matter when you leave your job. However, the amount your employer puts into the account may be subject to a vesting schedule.
If you are close to becoming fully vested in your 401(k) plan, you may want to delay your job search until you are fully vested if you have only a short period left, unless your salary is increasing significantly. You may get more in your 401(k) by waiting until you are fully vested before leaving the job.
With vesting, you may have to work for the company for a certain period before you can take the employer matching contributions with you when you leave your job. When you are fully vested, it means that all the money your employer has put into your 401(k) plan is yours, even if you leave your job before retirement.
Frequently Asked Questions (FAQs)
What does a 6% match mean for a 401(k) plan?
A 6% match for a 401(k) plan means that if you contribute 6% of your pre-tax salary to your 401(k) plan, your employer will match that amount. For example, if you earn $50,000 and contribute 6% to the plan, you would be adding $3,000. Your employer would also contribute $3,000. This means that you and your employer will each contribute $250 per month.
When does the year end for 401(k) matching?
The IRS resets the contribution limits on January 1 for 401(k) plans. Any contributions and matches made during the year (up to December 31) count toward your total contribution limit for the year. Your employer may make matching contributions at any time you contribute, or they may make deposits less frequently, such as quarterly or annually.
Source: https://www.thebalancemoney.com/maximizing-401k-match-2894175
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