What's a 401(k) Match?

Wondering how 401(k) matches work? We’ve got you covered.

Written by Jess Ullrich / July 15, 2022

Quick Bites

  • Employer matches are like free money for your 401(k).
  • Many companies offer a 3% or 6% match, though matches can be higher or lower (or zero) depending on where you work.
  • If it makes sense for your money situation, taking full advantage of an employer match can be valuable.

How amazing would it be to get free money for contributing to your retirement account? It would likely be an excellent motivator to start saving more for your future. And while it may seem beyond the realm of possibility, it may be more feasible than you think. Employer matching essentially functions as a reward for building your retirement nest egg.

If you’re wondering how it works, we’ve got all the info you need on employer matches, what types are available and how they’re treated from a tax perspective.

Inside this article

  1. Tell me about 401(k)s
  2. How does a 401(k) match work?
  3. Employer contribution limits
  4. What’s vesting?
  5. How about penalties and taxes?
  6. Is a 401(k) match worth it?

Tell me about 401(k)s

There are a few different types of 401(k) accounts, but they all have something in common: They can be an excellent retirement savings vehicle. Companies commonly offer a traditional 401(k) or Roth 401(k) plan. Companies with up to 100 employees may offer a SIMPLE 401(k) plan, which is a special retirement account for smaller businesses.

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What Is a 401(k)?

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Here’s a look at how the different types of accounts compare. Note that contributions to a traditional and SIMPLE 401(k) are pre-tax, meaning they’re tax-deductible in the year you make them. You’ll be taxed on withdrawals in retirement. Contributions to a Roth 401(k) are post-tax, so you won’t get a tax deduction, but you typically won’t be taxed on withdrawals later.[1]

Account typeWho's it forEmployee contribution limit (2022) Contribution tax treatment
Traditional 401(k) Companies of any size $20,500 for those 50 and under, $27,000 for those over 50 Pre-tax
Roth 401(k) Companies of any size $20,500 for those 50 and under, $27,000 for those over 50 Post-tax
SIMPLE 401(k) Employees at companies with up to 100 people $14,000 for those 50 and under, $17,000 for those over 50 Pre-tax

How does a 401(k) match work?

When an employer offers a 401(k) match, it means they either provide a dollar-for-dollar match or a partial match, typically up to a certain limit. A dollar-for-dollar match is exactly what it sounds like—your employer will match your 100% of your contributions, up to its established limit. With a partial match, your employer might match 50% of your contributions, up to its set limit.

Learn More: 401(k) Contribution Limits

So what are the set limits? You’ll commonly see an employer matching limit of 3% or 6%, though these numbers may be lower or higher depending on what your company offers. And be aware that some companies don’t offer a matching benefit at all, though companies with a SIMPLE 401(k) are required to provide a match.

For example, let's say your company provides a 3% dollar-for-dollar match for its traditional 401(k). If you make $100,000 annually and contribute $3,000 to your 401(k) in a given year, your employer would match your $3,000 contribution. This brings your total for the year to $6,000. Not bad, right?

What about contribution limits from my employer?

Alas, there are limits to how much your employer can contribute to your 401(k) each year. For 2022, those limits are $61,000 or up to 100% of your salary, whichever is less.[2] These are pretty hefty limits, though, and you’d need to have a very high income or a very generous employer to get a match of this level.

What’s vesting and how does it work?

There’s an important caveat to be aware of when it comes to 401(k) accounts: your vesting period. It’s pretty common for employers to have a vesting period of two or three years.

Vesting is essentially an incentive for employees to stay with a company. Until you’re vested, you won’t be able to take the employer contributions with you if you leave your job. So if you resign after a year and your vesting period is two years, you’d sacrifice any employer matches made during your tenure, though you’d be able to rollover your own contributions into a new 401(k) or other type of retirement plan.

How about penalties and taxes?

In general, you cannot withdraw your own or employer contributions from a traditional 401(k) until you reach age 59 ½. If you do so, you’ll typically pay ordinary income taxes on the amount and incur a 10% tax penalty. There are some exceptions where you won’t incur the penalty, but they’re pretty rare.

Read More: 401(k) Hardship Withdrawals

The rules are slightly different for a Roth 401(k). Since you’ve already paid taxes on your contributions, you can withdraw that portion of your account anytime without penalty. But you can’t withdraw employer contributions or gains because “the employer match in a 401k goes into the 'traditional' or pre-tax bucket,” says Jay Zigmont, a Certified Financial Planner and founder of Childfree Wealth. “While you may as an employee put your own money into a Roth 401k (post-tax), this does not change the employer match.”

Is a 401(k) match worth it?

Remember we mentioned that free money thing? Maximizing your free money is generally a smart move. It can be worth it if you can afford to contribute enough to your 401(k) to get the full employer match.

Let’s revisit our earlier example of the employee with the $100,000 salary and the 3% dollar-for-dollar employer match. If this employee contributes $3,000 to their 401(k) in a given year, and their employer matches that contribution, here’s what that $6,000 will look like over time (assuming an annual return of 7%.)

TimeAmount
After two years$6,869.40
After five years$8,415.31
After 10 years$11,802.91

Now let’s assume our unlucky employee doesn’t get the benefit of an employer match at all. (Sad face.) So instead of having $6,000 in their 401(k), they’d have $3,000. Again, we’re assuming an annual return of 7%.

TimeAmount
After two years$3,434.70
After five years$4,207.66
After 10 years$5,901.45

In these examples, our employer match makes a big impact on the individual’s 401(k) balance over time. But always keep in mind that your contributions will vary based on your unique situation and budget.

Article Sources
  1. “IRS Announces Changes to Retirement Plans for 2022.” IRS. Nov. 17, 2021. https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022
  2. “Operating a 401(k) Plan. IRS. https://www.irs.gov/retirement-plans/operating-a-401k-plan

About the Author

Jess Ullrich

Jess Ullrich

Jess Ullrich is a personal finance writer who's been creating online content since 2009.

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