401(k) Match: What is it and how does it work?

It’s the oldest financial rule in the book: there’s no such thing as a free lunch. But a 401(k) match, if it’s available to you, really is free money. For real.

Basically, a 401(k) match means that your employer will match a certain amount of the contributions you make to your 401(k) retirement plan. But there are some important strings attached to understand.

Keep reading to learn more about how a 401(k) match works and why (and how) you should take advantage of it!

What is a 401(k) Match — and How Does It Work?

An employer 401(k) match is when your employer makes contributions to your retirement account alongside your own contributions. It’s a compensation benefit that helps employees to save for retirement.

How does a 401(k) match work? The basics are pretty simple: you put money into your retirement account, and your employer does, too — up to a certain percentage of your income.

For example, say you make $50,000 a year and your employer offers a 4% dollar-for-dollar contribution match. That means they’ll match up to $2,000 of wages that you defer to your 401(k) rather than taking as payment today — and just like your 401(k) contributions, the match is tax-deferred. Pretty cool, right?

However, depending on your employer’s specific plan, things may be a little bit more complicated than that.

What Are the 401(k) Contribution Limits with an Employer Match?

Like other types of retirement accounts, 401(k)s come with contribution limits. But the good news is, your employer match doesn’t count toward your individual 401(k) contribution limits. And while your total contribution including the 401(k) employer match is limited, those limits are fairly high.

Here’s how it looks:

As you can see, older savers are offered slightly higher limits in order to allow them to make catch-up contributions to their retirement plans.

Does My Employer Match Count Towards My Personal 401(k) Limit?

Nope – you can still contribute up to $22,500 personally if you’re under age 50, or up to $30,000 if you’re 50 or older. The 401(k) match is limited by a second, larger total contribution limit of up to $66,000 for those up to age 50 or $73,500 for those 50 and older.

The IRS provides further detail on calculating partial deductions if you fall into that category.

If neither you nor your spouse have access to a retirement plan at work, the limits are a bit different:

Are 401(k) Matches Taxed?

Just like your regular contributions, 401(k) employer match funds are not taxed until you withdraw them. 

This is true even if you have a Roth 401(k), in which case you’re likely still eligible for a match in the same amount. You’ll still get the match, but it’ll be put into a secondary, tax-deferred account, and income taxes will be due when they’re withdrawn in retirement.

What is a Good 401(k) Match?

First, any match is better than no match — and fortunately, according to 2020 data from Vanguard, about 86% of employers offer some kind of 401(k) match program. A typical match is about 3-4% of your salary, though some employers might match as low as 1% or as high as 9% (though such generosity is pretty rare).

Furthermore, 401(k) matches might be structured in a variety of different ways. Dollar-for-dollar is the easiest to understand, but some companies also offer a lower per-dollar percentage up to a higher percentage of your overall pay — say 50% on the dollar up to 8% of your salary, as opposed to 100% on the dollar up to 4% of your salary. This is sometimes known as “stretching the match,” and is meant to encourage employees to save more.

Are There Any 401(k) Employer Match Rules?

Along with the contribution limits and match percentages, there is another important catch when it comes to 401(k) matches: the vesting schedule. Some employers require you to work at the company for a set amount of time before you’re fully vested.

Vested just means that you fully own the employer contributions to your 401(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.

For example, say your company’s vesting schedule works like this: you’re 0% vested for the first year, 20% vested for the second year, 50% vested for the third year and 100% vested by year four. If your employer contributes $2,000 and you leave halfway through your second year of employment, you’ll only get to keep $400 of it (plus whatever contributions you added to the account, and their growth), whether you cash it in or roll it over. This amount is known as your vested balance. But if you switch jobs 10 years in, you’ll get the full value of your 401(k) employer match – in other words, you’ll be fully vested.

If you’re not sure what you vested balance is or how your company’s vesting schedule works, you can always check with an HR rep for further clarity.

Bottom Line

A 401(k) employer match is a great opportunity — the closest thing to a truly free lunch you’re likely to find in the retirement game. Just make sure you fully understand how it works with your employer’s specific plan to avoid any surprises. Now get out there and meet your match!