How to Maximize Your 401(k) Employer Match

If I offered you the chance to immediately double every dollar you saved, would you take it?

Of course you would! You work hard to save that money, and a magic money-doubling machine is just the thing you need to make all that hard work pay off.

Well, in essence, that’s exactly what your 401(k) employer match is. It’s a way to get an immediate and guaranteed 50% to 100% return on your investment, which is as close to a magic money-doubling machine as exists in the real world.

And yet, according to the Society for Human Resource Management, one in four employees still aren’t taking full advantage of their 401(k) employer match, losing out on an average of $1,300 per year.

That’s real money, and it’s the easiest return on investment you’ll ever receive. So in this post you’ll learn all about how to take maximum advantage of your 401(k) employer match and the money-doubling magic it provides.

What Is a 401(k) Employer Match?

A 401(k) employer match works like this:

  1. You contribute money to your 401(k).
  2. Your employer matches that contribution up to a predefined limit, putting additional money into your 401(k) on top of your personal contribution.
  3. You get the benefit of both your contribution and your employer’s contribution earning returns for decades, making it easier to reach retirement sooner.

Most employers match 50% to 100% of your contribution, meaning that every dollar you contribute up to the max earns an immediate 50% to 100% return on investment. For example, a common employer matching program looks like this:

  • Your employer matches 100% of your contributions, up to 3% of your salary.
  • Your employer also matches 50% of your contributions on the next 2% of your salary.

Let’s say that you make $2,000 per paycheck and contribute 5% of your salary to your 401(k). That means that you make a $100 contribution to your 401(k) each time you’re paid (5% * $1,000).

According to the matching program described above, your employer will contribute another $80 to your 401(k) every time you make that $100 contribution. That $80 employer contribution is calculated like this:

  • (100% * 3% * $2,000) + (50% * 2% * $2,000) = $80

That is, as long as you contribute at least 5% of every paycheck, your employer will kick in an $80 matching contribution each time as well. That represents an 80% return on investment each time you contribute, in addition to the future returns you get from that money being invested.

Where else can you find that kind of deal?

How to Find Your 401(k) Employer Match

According to the Society for Human Resource Management, 92% of employers with a 401(k) offer at least some kind of employer match. So if you have a 401(k), you likely have a match available to you. The only question is how yours specifically works.

Most employers match either 100% of your contribution up to a certain limit, 50% of your contribution up to a certain limit, or a combination of the two like the example above. You’ll want to know how yours works so you know how to take maximum advantage of it.

The best place to look is your 401(k)’s summary plan description, which is a large document that explains the ins and outs of your 401(k) plan. You can search for the word “match” to find the section that explains your matching policy. If you have trouble finding that information or understanding it, you can ask your company’s HR representative to explain it to you.

However you find it, you’ll want to pay attention to two key pieces of information:

  1. The maximum percent of salary subject to the match: In the example above, the employer only matched contributions up to 5% of the employee’s salary. The employee could choose to contribute more than 5% of her salary, but contributions above that point would not be matched. When people talk about “maxing out your employer match,” they mean that you should contribute at least enough to meet this maximum percent of salary that is matched by your employer. The actual percent varies from company to company.
  2. The matching percentage: Does your employer match 100% of your contribution up to that limit? Do they match 50% of your contribution? Knowing this allows you to determine exactly how much money is being contributed to your 401(k), which is information you need in order to figure out whether you’re saving enough for retirement. Because yes, employer contributions do count towards that savings goal.

Two Pitfalls to Watch Out For

Your 401(k) employer match is without question a fantastic deal. Even if your employer only matches a small percent of your salary, it’s still a guaranteed return on investment that’s almost always worth taking advantage of.

Still, there are two potential pitfalls to watch out for if you want to get the maximum benefit.

1. Vesting

Your employer match may be subject to a vesting schedule, which simply means that you have to stay with your company for a certain amount of time before those employer contributions are 100% yours.

For example, your employer contributions might vest 20% each year, in which case 20% of those contributions would be yours after one year and you’d have to stay at the company for five years before you owned them completely.

Vesting usually isn’t a reason to avoid your employer match, but it can decrease the value. Here’s an article with everything you need to know about how it works: 401(k) Vesting: What It Is and Why It Matters.

2. Front Loading

Generally, saving as much as you can as soon as you can is a good idea. The sooner you get your money into the market, the longer you get to take advantage of the superpower known as compound interest.

But front loading your 401(k) contributions often isn’t a good idea because it would cause you to miss out on a significant portion of your employer match.

When your employer offers to match your contributions up to a certain percent of your salary, that cap almost always applies on a per-paycheck basis. So if your employer matches contributions up to 5% of your salary, you could contribute your entire paycheck to your 401(k), and your employer will still only match it up to 5% of that paycheck.

Which means that in order to take full advantage of your employer match, you need to make sure that you contribute at least the maximum percent of salary your employer matches every single paycheck. Otherwise you’ll be missing out on some money.

Are You Taking Full Advantage of Your 401(k) Employer Match?

Your employer match isn’t quite a magic money-doubling machine, but it’s pretty close. And knowing how to take full advantage of it will certainly make it easier for you to reach financial independence even sooner.

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Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families. His free book, The New Family Financial Road Map, guides parents through the all most important financial decisions that come with starting a family.

Matt Becker

Contributor for The Simple Dollar

Matt Becker, CFP® is a fee-only financial planner and the founder of Mom and Dad Money where he helps new parents take control of their money so they can take care of their families. His free time is spent jumping on couches, building LEGOs, and goofing around with his wife and their two young boys.