A 401(k) match is like free money — here's how it works (2024)

FAQs

A 401(k) match is like free money — here's how it works? ›

Key takeaways. A 401(k) match allows an employee to receive 'free' money from their employer for contributing to their retirement plan. The amount of the match can differ, and the employer contribution may be a full or partial match, up to some percentage of the employee's salary.

The 401(k) is now the most popular type of retirement plan, with many employers providing a company match when workers sock away money in their accounts. But these matches — often shorthanded as "free money" from your company— may exacerbate inequality in retirement, new research finds.

Contributions to these employer-sponsored plans are tax-deferred, so they lower your taxable income and can put you in a lower tax bracket. In addition, many companies that offer 401(k) plans will match some or all of their employees' contributions. That's essentially free money you can put toward your retirement.

Your employer determines how your 401(k) match will work, but they usually follow a formula of putting in a dollar or a portion of one for each dollar you contribute. If you have a full match, that means 100% of your contributions will be matched dollar-for-dollar.

A 401(k) is a tax-advantaged retirement plan that is set up and managed by an employer. Basically, you put money into the 401(k) where it can be invested and potentially grow tax free over time. In most cases, you choose how much money you want to contribute to your 401(k) based on a percentage of your income.

One key advantage of a 401(k) plan is that employers often provide a matching contribution. Employer matches represent a guaranteed return on your retirement investment, and it almost always makes sense to maximize them.

Your employer gets to take back any unvested contributions. If there was no vesting schedule — in other words, if 100% of employer contributions vested immediately — then it's all yours. (Of course, any money you put in yourself is always yours either way.)

If you're earning a salary of $100,000 and an employer offers to match your contributions up to 3% of your pay, you're really bringing in $103,000—and you don't have to pay taxes on all of that income. While an employer match isn't going to make or break your retirement savings, says Zigmont, it can offer a nice boost.

Employers must match employee contributions up to 3% of their salary or make a 2% contribution on behalf of all eligible employees, regardless of whether they make salary deferrals.

Generally, you have 4 options for what to do with your savings: keep it with your previous employer, roll it into an IRA, roll it into a new employer's plan, or cash it out. How much money you have vested in your retirement account may impact what decision you make.

Do I have to pay taxes on my 401k after age 65? ›

Do You Have to Pay Taxes After Age 65 (or 59 ½)? Your age can affect how much you pay in taxes. Again, the early withdrawal penalty usually applies to those under the age of 59 ½. After that age, you still have to pay federal income tax on withdrawals in most cases, but the penalty goes away.

If you have reached the age of 59½ (or 55 or 50, in certain cases), you can cash out your 401(k). But keep in mind that you have to pay taxes on whatever you withdraw. Depending on the size of your account, you could be facing a huge tax bill, especially since those funds may bump you into a higher tax bracket.

In all, however, the 401(k) is a great option for you retirement savings. Given the tax advantages, the ease of use and the possibility of those additional matching funds, if your employer does offer a 401(k), you should definitely consider taking advantage of it.

A company contribution to a 401(k) plan on a partner's behalf is treated as a guaranteed payment. A partner can generally take a federal income tax deduction equal to any company match.

Although your pretax 401(k) contributions are tax deductible today, you'll eventually have to pay taxes on the money. It's important to be aware of your marginal tax bracket, because any 401(k) withdrawals that aren't rolled over into a qualified plan or IRA will be treated as regular income.

The most common partial match provided by employers is 50% of what you put in, up to 6% of your salary. In other words, your employer matches half of whatever you contribute … but no more than 3% of your salary total. To get the maximum amount of match, you have to put in 6% of your salary.