Matching contributions
Tax advantages aren't the only upside to participating in employer sponsored retirement plans. You may get some free money! In some cases, your employer may also contribute by matching some portion of your own contribution. If your employer contributes cash to your account, you can invest the added money as you like. Some employers match contributions with shares of the company's stock.
If you're part of a plan that offers matching contributions, you'll want to find out what percentage of your contribution that your employer will add. Even if you can't afford to save the maximum you're allowed to contribute, adding the most your employer will match lets you maximize the free money.
For example, some employers add 50% of what you put in, or 50 cents for every $1, up to 6% of your salary. The more you add, up to the limit, the more matching you're eligible for.
You contribute | Your employer contributes | Total |
|---|---|---|
3% of $25,000 salary, or $750 | 50% of your contribution, or $375 | $1,125 |
6% of $25,000 salary, or $1,500 | 50% of your contribution, or $750 | $2,250 |
3% of $50,000 salary, or $1,500 | 50% of your contribution, or $750 | $2,250 |
6% of $50,000 salary, or $3,000 | 50% of your contribution, or $1,500 | $4,500 |
Vesting
All the money you put into a 401(k) plan is yours, and you can take it with you if you change jobs. In most cases, though, you'll have to stay at your job for a certain length of time, known as a vesting period, before any of your company's matching funds are yours permanently. That means if you leave your job before you become fully vested, you won't get to keep your employer's contribution.
Some companies use a graded vesting schedule, which means you're entitled to 20% of the matched funds after two years. Your vesting percentage increases 20% each year, until you're fully vested after six years. Alternatively, if your employer uses a cliff vesting schedule, you might be fully vested after three years. The vesting period can be shorter, but it can't be longer than six years.
Planning a move
Talk to someone in your employer's benefits department if you're not sure what the vesting rules are. If you're considering taking a new job, it's worth investigating whether it might pay to stay with your current employer a little longer to be fully vested.
