How to Maximize Your 401(k) With Employer Match
Learn how to understand your employer match formula, calculate the free money available, and ensure you contribute enough to capture the full match.
Understand How Your Employer Match Works
Employer 401(k) matches come in several common structures. The most common is a percentage-based match up to a contribution limit. For example, your employer might match 50% of your contributions up to 6% of your salary. This means if you contribute 6%, your employer adds 3%, giving you a combined 9% going toward retirement.
Another common structure is a dollar-for-dollar match up to a certain percentage. Some employers match 100% of contributions up to 3% of salary. If you contribute 3%, your employer contributes 3%, doubling that portion of your contribution.
Read your 401(k) plan documents or ask HR to explain your specific match formula. The exact structure determines how much you need to contribute to capture the full match.
Calculate the Free Money You Are Getting
Once you understand your match formula, calculate the annual dollar value of the match you are eligible for. On a $60,000 salary with a 50% match up to 6% of salary, the maximum match is $60,000 times 6% times 50%, which equals $1,800 per year.
Expressed differently, contributing $3,600 of your own money per year (6% of $60,000) triggers a $1,800 employer match. That is a guaranteed 50% return on your contribution before any market returns. No investment available to retail investors comes close to matching that guaranteed return.
If you are not currently contributing enough to capture the full match, calculate how much you need to increase your contribution percentage in your 401(k) settings. The additional contribution is almost always worth it even if it requires reducing spending elsewhere, because the employer match is part of your total compensation.
Set Your Contribution to Capture the Full Match
Log into your 401(k) account portal or contact HR to adjust your contribution percentage. Set it to at least the level required to receive the full employer match. For a 50% match on contributions up to 6%, set your contribution to 6%. For a 100% match on contributions up to 3%, set your contribution to 3%.
Consider setting the contribution slightly above the match threshold to build the habit of higher saving. Many financial planners recommend 10% to 15% of gross income as a total retirement savings rate (including the employer match). If your match brings the total to 9%, contributing an additional 2% of your own money reaches 11% total, which is in a healthy range.
Review your contribution election annually, especially after receiving a raise. Keeping contributions at a fixed dollar amount while your salary grows means your percentage contribution falls over time. Adjusting the percentage to maintain the target rate ensures your savings grow proportionally with your income.
Understand Vesting Schedules
Employer match contributions are often subject to a vesting schedule, meaning you do not fully own the employer contributions until you have worked at the company for a certain period. Common vesting schedules include cliff vesting (you own 0% until a specific date, then 100%) and graded vesting (you own an increasing percentage each year until fully vested).
If you leave a job before you are fully vested, you may forfeit some or all of the employer match contributions. Your own contributions are always 100% yours, but the employer's money may be subject to forfeiture.
Factor vesting into your job change decisions. Leaving six months before you become fully vested might forfeit thousands of dollars in matched contributions. In some cases, it is worth negotiating a start date with a new employer that allows you to cross a vesting threshold before leaving.
What to Do After Capturing the Match
Once you are contributing enough to capture the full employer match, consider where to direct additional retirement savings. The standard financial planning recommendation is to max out a Roth IRA if you are eligible, then return to the 401(k) to increase contributions toward the annual limit.
For 2024, you can contribute up to $23,000 to a 401(k). If your employer match pushes total contributions above that limit, the limit applies only to employee contributions — employer contributions are in addition to this limit.
Also ensure you are invested in appropriate funds within your 401(k). Capturing the full match while invested in a money market fund earning near zero is much less effective than capturing the match and investing in a diversified stock fund with long-term growth potential. Review your investment choices and select a low-cost diversified option appropriate for your time horizon.