A 401(k) contribution match is one of the best benefits an employer can offer—it’s essentially free money for your future (or, as we like to call it, a free lunch)! Employer matches are becoming more common than ever. According to a Plan Sponsor Council of America (PSCA) survey, an estimated 98% of companies that offer 401(k) plans also match contributions.
Let’s look closer at employer matching and what it can mean for your retirement strategy.
What Exactly is an Employer Match?
An employer match is a contribution your employer makes to your retirement account based on your annual contribution amount.
Consider an example. If your 401(k) plan offers a 6% match, the employer will match up to 6% of your overall compensation in addition to your contribution. If you earn $50,000 per year, the employer’s match is $3,000. So, a 25-year-old receiving $3,000 a year in employer contributions and assuming 7% returns over 35 years would accumulate $414,710.
Yep, it’s that simple! The main difference is how a match works in a Traditional 401(k) versus a Roth 401(k). More on this below.
401(k) Contribution Limits
In 2024, the IRS limits personal 401(k) contributions to $23,000 a year ($30,500 if you’re over 50). Employer match contributions don’t count toward the personal contribution limit. However, there is a limit for combined contributions: As of 2024, it’s either 100% of your salary or $69,000.
What About Roth 401(k) Employer Matching?
If you have a Roth 401(k), you pay income taxes on your contributions now, just as you do in a Roth IRA. Because your employer, in most cases, doesn’t pay your income taxes on matching contributions, their contributions usually go into a separate regular pre-tax 401(k). When you withdraw, you’ll pay taxes on the Traditional 401(k) funds. There are exceptions, as some employers will match in a Roth 401(k), though this is rare.
Ensure You’re Getting Your “Free Lunch”
Don’t miss out on additional retirement savings because you haven’t signed up correctly! Review your 401(k) and check with your company’s HR department to ensure you’re getting your employer match or “free lunch.”
And if you’d like to evaluate your overall retirement plan and options, contact Carlson Investments today to speak with one of our advisors.
Carlson Investments does not provide tax, legal, or accounting advice. This content has been written for informational purposes only. Always consult your individual tax, legal, or financial professionals for advice tailored to your situation.
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