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How does 401(k) matching work?

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Ezra Bailey/Getty Images

Contributing to an employer-sponsored 401(k) plan is one of the easiest ways to save for your retirement in a tax-advantaged way. When you sign up to participate in a 401(k), you choose to make contributions from a percentage of your paycheck that are automatically directed into the plan.

Your employer has the option to match some or all of your contributions as an employee benefit, helping to grow your savings even faster. It's essentially free money your employer is giving you to invest for your future self.

Let’s break down how 401(k) matching works.

What is 401(k) matching?

With 401(k) matching contributions, your employer adds their own money to your retirement account based on the amount that you contribute yourself. It's an employee benefit or incentive that's completely separate from your wages or salary. Companies aren't required to offer a match, but most do. In fact, some employers may contribute money to your 401(k) regardless of whether you contribute.

There aren't universal 401(k) employer match rules, so every workplace may offer something just a little different from others. Here are four key details to know:

1. Employers match contributions in various ways

Employers commonly choose between a dollar-for-dollar match, a partial match, or a combination of the two.

  • Dollar-for-dollar match: The employer puts a dollar into your account for every dollar you contribute up to a specific percentage of your salary, such as 3%.
  • Partial match: The employer offers a partial match up to a certain dollar amount, such as 50 cents for every dollar you contribute up to 5% of your salary.
  • Combination approach: An employer may use a combination of the dollar-for-dollar and partial match approaches. It's not uncommon, for instance, to have a dollar-for-dollar match up to 2% of your salary and then a partial match for the next 3%.

2. Matching with traditional vs. Roth 401(k)s

Thanks to the SECURE Act 2.0, employers can directly make matching contributions to Roth 401(k) plans the same way they've always been able to for traditional plans. But because traditional 401(k)s tax your contributions later and Roth 401(k)s tax your contributions now, it will make a difference in how your employer matching is treated.

Traditional 401(k) employer matching doesn't require any special tax reporting as the pre-tax dollars that fund it can easily be taken directly from your pre-tax paycheck. But if you receive Roth 401(k) matching from your employer, you must include that amount in your taxable income in the year it's received.

3. There are annual 401(k) contribution limits

Contributing enough to get your full employer match is one goal. But you can choose to divert even more money from your paycheck if you want. That is—until you reach the contribution limits dictated by the IRS or 100% of your annual compensation, whichever is less.

These are the limits for 2024:

  • Contributions by employees: $23,000 (or $30,500 for ages 50 and older due to catch-up contributions)
  • Combined contributions of employees and employers: $69,000 (or $76,500 for ages 50 and older due to catch-up contributions)

If you reach the contribution limit but still want to save more money for retirement, you may want to contribute to another type of retirement account, such as an individual retirement account (IRA).

4. How vesting could factor into the match

The contributions you make to your 401(k) belong to you no matter what, but that's not always the case for the matched amount. Your company may not allow employer-contributed funds to be vested, or legally owned, by employees right away.

Instead, your employer may have a policy that says you have to have worked with the company for a certain amount of time before you can be fully vested. Alternatively, your employer may vest an increasing percentage of your match over time. For example, you could receive 20% of the match during your second year of service, 40% during the next and so on until you're 100% vested.

Get the most out of your employer 401(k) match

As you weigh how much to contribute to your 401(k), realize that your contributions will bring along the most "free" employer-matched dollars when you're contributing enough to reach the full match. If you don't, you're leaving money on the table.

For example, say you make $50,000 per year and your employer matches dollar-for-dollar up to 5% of your salary. That means you could potentially nab an extra $2,500 in employer contributions for the year as long as you're also putting in at least $2,500 for the year, resulting in at least $5,000 for your 401(k). But if you set your contributions to, say, 2%, you're putting in $1,000 and that's all your employer will match, too, putting you at just $2,000 for the year.

Strategize for your retirement

If 401(k) matching is not an option with your current employer, other opportunities are available for accumulating retirement savings that can help you achieve your goals. A Thrivent financial advisor can guide you through the options and help you set the best strategy for your retirement plan.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.