You told me that one of the biggest advantages of a 401k account is the employer match. But can you explain it to me?
Employer match means that your employer also contributes money to your 401k account – in addition to the amount you contribute to it yourself. This is essentially like getting free money from your employer!
How much is the employer match?
How much the employer contributes depends on the specific employer, but it is usually up to a certain percentage of your pay.
For example, your employer can offer a 100% match for up to 5% of your pay. So if you earn $50,000 a year, your contribution up to $2,500 to your 401k would be matched by your employer dollar for dollar. If you contribute more, the employer match is capped at $2,500, which is 5% of your pay.
Some employers can offer a lower match too – for example, a 50% match for up to 8% of your pay. So if you earn $50,000 a year, your employer will contribute 50 cents for every dollar you contribute to your 401k up to $4,000, which is 8% of your pay. For example, if you contribute $2,000, your employer would add $1,000.
Wow, the employer match sounds amazing! So all the money the employer puts in my 401k account is mine?
Yes, it is. However, it may not immediately be yours. When the employer match becomes yours depends on the vesting schedule.
With some companies, the vesting is 100% – which means that the employer match becomes yours immediately. But with most companies, a certain percent of the employer match vests, or becomes yours, every year.
For example, a company can have a vesting schedule of 25% over 4 years, which means that 25% of the employer match vests at the end of every year, with all of the employer match becoming yours – or vesting 100% – at the end of 4 years. Usually, once you reach 100% vesting, all subsequent employer matches are immediately yours.
Is employer contribution counted towards the 401k yearly contribution limit?
No! This is another benefit of the employer match – it doesn’t count towards your yearly 401k contribution limit. So when you take advantage of your employer match, you effectively contribute more to your 401k account and further accelerate saving for your retirement.