How Do 401(k) Matches Work

If your business provides a ​401(k)​ plan, it's important to take advantage of the opportunity during open enrollment in November. If you're lucky enough to work for an organization that provides an employer match for 401(k)s, every contribution you make will earn you free money. A 401(k) match is a great way to build your retirement savings with minimal monthly investment on your part.

Retirement plans have long been an important job perk. Employers can win top talent by combining a competitive annual salary with employee benefits like retirement savings, profit-sharing and vacation time.

At one time, businesses and organizations offered pensions, which were fully funded retirement accounts. But pensions, also known as defined benefit plans, have gradually disappeared over the years, with only ​67 percent​ of private-sector employees having access to defined benefit plans in ​2020​. Instead, an increasing number of private-sector employers now offer matching contributions, which means your employer matches what you put in.

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If your employer offers matching funds on a Roth 401(k), it's worth weighing the pros and cons of each.

Not all matching programs work the same, so it's important to read the rules associated with yours. Some companies offer a full employer match of whatever you put in, with no limits. But more often, your employer puts in money to match what you contribute up to a certain amount.

In other cases, you'll be presented with a matching formula that limits your employer's matching contributions to a certain percentage. So if you put in ​$100​ a month and your employer matches ​20 percent​, you'll see ​$120​ deposited into your 401(k) account each month.

Before you sign up for any retirement savings plan, it's important to note IRS regulations regarding setting money aside for later. The IRS only allows you to put a certain amount of money into your 401(k), and that includes the amount your employer contributes.

For ​2022​, you and your employer can make a total annual contribution of up to ​$20,500​. If you're over the age of ​50​, though, you can extend that contribution limit to ​$27,000​ with a ​$6,500​ catch-up contribution.

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The best thing about participating in your company's 401(k) plan is that you get a break on income taxes. Your retirement contributions go directly into your retirement savings with no taxes coming out of it. That means you can put off paying taxes until you retire.

But maybe you want to pay taxes now and enjoy tax-free distributions during your retirement years. Like a Roth IRA, a Roth 401(k) plan allows you to put the money in after you've paid taxes. If your employer offers matching funds on a Roth 401(k), it's worth weighing the pros and cons of each.

When you start a new job with a retirement savings plan, the money won't be yours immediately. Most companies follow something known as a vesting schedule, which states that you must be an employee making contributions for a set number of years before you can take money out of the account. This applies specifically to the amount your employer contributes. The money you put in is ​100 percent​ yours from day one.

But you can't access your 401(k) plan at any time without penalty. In addition to the period of time your employer's vesting schedule stipulates, the IRS won't let you take the money out until at least age ​59 1/2​. However, if you leave or are fired from your job at the age of ​55​ or older, you can take the money out without penalty. This is known as the Rule of 55.

Employer contributions can help you build retirement savings quickly, especially if it incentivizes you to make regular contributions. If you're looking for a new position, factor in benefits like 401(k) matching as you're weighing offers and considering your next career move.

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