Making the most of your 401(k) plan is one of the most important things you can do when it comes to retirement planning. Because your company may match the funds you deposit into your account. If you work for a firm that offers a 401(k) match and put money from your paycheck into it, your employer will match it.
If your firm provides a match, you may have received notification when you started your work. If you haven't already heard, you can inquire with your company's 401(k) plan manager about if a 401(k) match is available. Companies want their employees to contribute to their 401(k), so they match the money as a method to encourage them to do so.
Consider matching funds to be free money from your employer after you make pre-tax contributions to your 401(k) plan from your paycheck. If you do not contribute to your 401(k), you forfeit the opportunity to receive your employer's matching contribution.
Stretching the Match
Some businesses provide a 100 percent matching benefit, while others do not match any contributions made to a 401(k). Many provide a 50% match, which is preferable than no match at all.
Some plans may provide a lower-percentage match on a larger amount of an employee's compensation. For example, an employer may match 50% of the first 8% of your income rather than 100% of the first 4% of your compensation. This is done to encourage employees to deposit more money into their accounts. This is known as "extending the contest."
According to Vanguard's Center for Investor Research, increasing the match does not result in higher contribution rates or increased employee involvement. Employees are more likely to contribute to a plan if their company matches 100% of their contribution.
You may be required to work at your job for a set period of time before the firm begins matching your contributions. Some firms require you to wait a certain amount of time—say, three, six, or a year—before you may contribute to your 401(k).
Some Match Examples
A common amount that employees choose to contribute to a 401(k) matching scheme is 6%. When you contribute 6% of your pre-tax yearly income to your plan, your employer will contribute to it. Here's an illustration of how that may work:
- 50% match up to the first 6%: Your company will contribute 50 cents for every dollar you contribute, up to 6% of your total earnings for the year. For example, if you make $50,000 per year and contribute at least 6% of your earnings to your plan, you will receive a $1,500 match from your employer for that year. That's because 6% of $50,000 is $3,000, and your employer will contribute half of that, or $1,500. When you add that amount to what you've already contributed, you'll have a total of $4,500 in your 401(k) for the year.
Here's an example of a company who is more helpful in terms of the quantity of its match but less so in terms of the percentage of your income it is prepared to match:
- Dollar-for-dollar match up to 5%: Your firm may match a dollar for every dollar you contribute to your 401(k) plan until you achieve a total of 5% of your pre-tax earnings for the year. If you make $50,000 and contribute 5% to the plan, you've invested $2,500. Then, your company will match it 100 percent, for a total of $2,500. You'll have $5,000 in total for the year.
Contribution Dollar Limits
The maximum amount you may contribute to your 401(k) plan in 2021 is $19,500. If you are 50 or older at the end of the year, your individual limit increases by $6,500 because you are eligible to make a catch-up contribution in that amount. This raises your individual limit to $26,000 per year.
The total amount you and your employer contribute to a 401(k) account in 2021 cannot exceed the lesser of: the entire amount you are paid in salary and bonus, and $58,000 if you are under 50, or $64,500 if you are 50 or over.
The individual 401(k) plan contribution maximum for 2022 will be $20,500, with a catch-up contribution of $6,500 for individuals 50 and over, for a total of $27,000.
Timing Payments for the Most Money
Some businesses will pay their match regardless of how many paychecks it takes you to meet your annual limit. However, many employers will only make a contribution during the pay periods when 401(k) funds are deducted from your paycheck. You can prevent losing money to your employer by putting in lesser sums each pay month. As a result, your company will deposit funds into your account on a regular basis.
Assume you get paid twice a month and your company will only contribute to your 401(k) when you do. If you hit your $19,500 maximum before the end of November, you'll have lost out on two opportunities for your employer to match. In this example, you'd be making considerably more than $50,000 per year, but this problem might arise regardless of your income if you deposited too much money into your 401(k) too quickly.
Your plan manager can assist you in managing your 401(k) account to maximize your company match. You may also use an online calculator to determine how much money you should contribute from each paycheck.
The money you contribute to your 401(k) plan is yours to retain regardless of when you leave your work. Your employer's contribution, on the other hand, will very certainly be subject to a vesting schedule.
If you're nearing the end of your 401(k) vesting period, you might want to put off your job hunt for a few more months. You stand to benefit far more in your 401(k) if you wait until you are completely vested before leaving.
With vesting, you must work for the firm for a set period of time before taking your employer's money with you when you depart. Full vesting implies that all of the money your employer contributed to your 401(k) is yours to retain, even if you quit your work before retiring.
Questions and Answers (FAQs)
What is a good 401(k) match?
According to T. Rowe Price's 2021 benchmark report, the most typical match provided by companies is 50% to 6% of the employee's salary. Anything better would be an above-average matching strategy.
When does the fiscal year for a 401(k) match end?
The year begins over on January 1 for IRS contribution restrictions. Any donations and matching contributions made during the year (up until December 31) count against your annual contribution limit. A calendar year is what it's called. Your company may choose to deposit its match every time you deduct your contribution from your paycheck, or it may opt to deposit it at less regular periods, such as quarterly or yearly.