When you contribute to a 401(k) you put your own money in, called a contribution. That contribution is made with pre-tax dollars, invested within the 401(k) account, and grows tax-deferred until you withdraw in retirement. If a company offers matching contributions, they will contribute additional money to your 401(k) based on how much you contribute.
In other words, when you contribute to your 401(k), your company will contribute some too. The dollar amount an employer will match is limited, so it’s important to understand how those limits work.
Contributing enough to get the maximum available employer match is almost always the right move for everyone. It’s basically free money.
There are different types of matching, but the two most common are full matches and partial matches.
A full match, or dollar for dollar match, is the simplest to understand. Your employer will match every dollar you contribute with another dollar, up to a limit.
A common example would be a 3% dollar for dollar match. Every dollar you contribute, up to 3% of your annual salary, would be matched 100%. So if you make $50,000 you would want to make sure to contribute at least 3% of that ($1,500) to your 401(k). That 3% of your salary would be matched by another $1,500 from your employer. Therefore, you contributed $1,500 of your salary and ended up with $3,000. That’s a pretty good investment! You can contribute more than the 3% ($1,500) but it wouldn’t be matched by your employer.
A partial match works in a similar way. Your employer matches a portion of every dollar you contribute to your 401(k), up to a limit.
A common example is a 50% match up to 6% (sometimes referred to as $0.50 on the dollar up to 6%). For every dollar you contribute, up to 6% of your salary, your employer will add an additional 50 cents. If you make $50,000, you would want to make sure to contribute 6% of your salary ($3,000) to get the full match. Therefore, you contribute $3,000, and your employer matches 50% of that with an additional $1,500 for a total of $4,500 contributed to your 401(k) for the year.
You may notice that in both examples above the employer contributed the max of $1,500 to an employee making $50,000 a year. The difference is how much the employee had to contribute to get that full match. That’s why it’s so important to understand how your company match works (if you have one) and make sure you maximize it.
There are many different types of matching contributions and even some non-matching contributions a company can make to an employee’s 401(k). If you want to make sure you’re making the most of yours, chat with a BrightDime coach.