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A 401(k) match is when an employer contributes a certain amount to an employee’s retirement account based on how much the employee contributes. Matching contributions from employers are fairly common, and taking advantage of them is an important part of saving for retirement. Experts sometimes refer to employer matches in retirement plans as “free money” because your company is giving you extra money just for contributing to your own retirement account.

Here’s more information on 401(k) matches and exactly how they work.

Key takeaways

  • A 401(k) match allows an employee to receive 'free' money from their employer for contributing to their retirement plan.
  • The amount of the match can differ, and the employer contribution may be a full or partial match, up to some percentage of the employee's salary.
  • A 401(k) match is typically subject to vesting requirements, meaning this money does not become fully the employee's until after some period of time.

How 401(k) matching works

Many companies offer a 401(k) match as part of their retirement plan, but the exact terms of the match will depend on your employer’s unique offering. Here’s how the most common types of 401(k) matches work.

Partial matching

A partial 401(k) match is when an employer contributes a portion of whatever the employee contributes to their retirement plan. For example, the employer might agree to match 50 percent of the employee’s contribution up to the first 6 percent of the employee’s pay. This means that if you make $60,000 per year and contribute 6 percent of your pay to the 401(k) plan, or $3,600, your employer will also contribute $1,800 (half of your contribution) for a total contribution of $5,400.

You should make sure that you’re at least contributing enough money to your retirement plan to receive the full matching contribution from your employer. This is what experts are referring to when they talk about “free money.” It’s like earning a guaranteed 50 percent return on your contributions.

Dollar-for-dollar matching

In a dollar-for-dollar match, employers agree to contribute 100 percent of the employee’s contribution up to a certain percentage of the employee’s pay. In this scenario, if you earn $60,000 per year and contribute 3 percent of your pay to a 401(k) plan, your employer will match the contribution, allowing you to reach a total contribution of 6 percent of your pay. In this scenario, your contribution would be $1,800 and your employer’s match would make it a total contribution of $3,600.

It’s important to think about what the total contribution to the plan will be and whether that amount is enough to help you meet your retirement goals. In many cases, simply contributing what’s necessary to receive the full matching contribution from your employer likely won’t be enough to help you achieve your long-term goals.

What’s the average 401(k) match?

According to Vanguard’s How America Saves report, 4.5 percent is the average value of promised employer matches. The annual report, which explores the behaviors of nearly 5 million retirement plan participants across Vanguard’s business, found that the most cited matching formula for a typical employer match was 50 percent on the first 6 percent of employee contributions.

Average 401(k) match rates increased slightly from 2016 through 2022. In 2022, about 8 in 10 plans required participants to defer between 4.0 and 6.99 percent of their pay to receive the maximum employer match, according to the report.

Understanding the average 401(k) match can give you a benchmark to compare with your own company’s offering, but keep in mind that specific details of matching programs vary from company to company.

Do employers match contributions to a Roth 401(k)?

Yes, but there’s a catch. If you contribute money to a Roth 401(k) plan, which allows you to make contributions with after-tax dollars in return for tax-free withdrawals during retirement, your employer’s matching contributions can be made on either a pre-tax or after-tax (Roth) basis.

Before 2023, matching contributions to a Roth 401(k) had to be made on a pre-tax basis, meaning they were counted as contributions to a traditional 401(k) plan. But now, as part of the SECURE Act 2.0, employers may allow matching contributions on an after-tax basis as well.

401(k) contribution limits

There’s a limit to what you can contribute to 401(k) plans. For 2024, the Internal Revenue Service allows you to contribute up to $23,000, up from $22,500 in 2023. But the good news is that employer matches don’t count against this limit.

The total 401(k) contribution limit, which includes employer matches and after-tax contributions, is $69,000 in 2024, up from $66,000 in 2023. Those aged 50 and older can contribute an additional $7,500 as a catch-up contribution.

What is vesting and how does it work?

Some retirement plans also have a vesting schedule as part of the offering. This means that if you leave your job before a certain time, you may not be able to keep everything that your employer contributed to your plan. Your own contributions are always fully vested, however.

For example, some vesting schedules might take place over five years, allowing you to keep 20 percent of the employer’s contributions after each year you’ve been with the company. After hitting the five-year mark, you’ll be 100 percent vested and all future contributions will also be fully vested. Be aware if your company’s plan has a vesting schedule and if so, how it works.

Bottom line

A 401(k) match from your employer is a great way to boost your retirement savings and is a common feature of most plans. Make sure you understand exactly how the terms of your plan’s match work, so you can maximize it and ensure that you’re saving enough to meet your retirement goals.