Getting the most out of your employer’s 401K match is one of the most important “must-do” strategies of retirement planning. To maximize the value you receive from your 401(k) match, keep the following in mind:
Understand That It Really is a 401K Match
Typically, you only receive a contribution into your 401(k) plan if you make a contribution yourself. When you save some of your paycheck by putting money into your 401(k), your company does as well. But if you fail to save a dollar, than your company match goes away too.
Understand Your 401K Matching Program
Some companies don’t even have a 401(k) plan. For those that do have plans, each plan can be different. Some employers have very generous matching programs. Others have relatively paltry matches or no matching program at all. Ask your HR representative for an overview of your 401(k) matching program. Here are two sample matching programs and how they work:
- 50% match up to the first 6% – If you have such a plan, your employer will place 50 cents into your retirement plan for every dollar you put in. Each year, there is a limit of 6% of your gross salary that the employer will match. Therefore, an individual with a salary of $50,000 that contributes at least 6% to his/her 401(k) plan will receive a matching contribution from the employer of $1,500. Note, however, that an employee who doesn’t contribute to the plan will receive nothing from the employer in the way of a match.
- Dollar for dollar match up to 5% - For every dollar you put in your 401(k) plan, your company will also put in a dollar. Once you reach a total of 5% of your gross pay contributed for the year, your employer won’t add any more dollars to your account until the next calendar year.
Keep in mind your matching program may be different from those presented above.
Don’t Turn Down Free Money
If you fail to contribute to your 401(k) plan up to the amount your employer matches, then you are turning down money your company would otherwise be providing for your retirement. It is hard to imagine a scenario when turning down free money is a good idea. Be sure to take advantage!
401K Match and Annual Limits
Regardless of your company’s matching program, you can’t contribute more than $16,500 to your 401(k) in 2009 ($22,000 if you are 50 or older.) When your company’s matching contribution is added to your contribution, the total amount may exceed these limits. Since the limits are annual, your employer may stop matching your contributions during the year. Then, once January rolls around, you’ll notice more money going into your 401(k) plan from your company’s deposits.
Beware of the Vest
No matter when or how you terminate employment, the money you contribute to your 401(k) plan is yours to keep. However, the contributions made by your employer may be subject to a vesting schedule. Make sure you understand your vesting program before you quit your job!
No Match for IRAs
No matching contributions are available for an IRA you might open yourself. This lack of free money is one reason why it usually makes sense to first prioritize saving money in a matched 401(k) account before contributing to an IRA. Once you reach the matching limit, however, be sure to check out a regular IRA or a Roth IRA.