Approximately 25% of US workers ignore free money offered by their employers—are you one of them? If you’ve never heard of a 401k match program, you might be! It’s free money on the table that you can use to build even more wealth.
Our goal at Paycheck to Wealth is to help employees maximize their paychecks towards financial independence. This article will help you understand what a 401k match is and the action steps to start benefiting from it on your next paycheck!
What is a 401k Match?
A 401k match refers to additional money contributed by an employer to an employee’s 401k based on their own contributions. There are two types of 401k match programs that companies can offer employees:
1. 100% 401k match program – this is when your company gives dollar-for-dollar contributions up to a certain percentage of your annual income.
2. Partial 401k match program – this is when your company gives a percentage of the amount you contribute as additional funds in your 401k.
According to the Vanguard “How America Saves” 2024 Report, the average 401k match contributions are 4-5% of your salary.
If your company offers a 401k match program, you’re in luck! It’s considered a compensation perk that employees should always take advantage of. It’s a benefit employees can use to get free money from their employer in addition to their paycheck.
How Does it Work?
Employees enrolled in their company’s 401k match program will start reaping the benefits of free money every month. To get the company match, you must consistently invest in your 401k plan (see the difference between a Roth vs. Traditional 401k). Every time you get a paycheck and contribute to your 401k, your company will invest your match.
Heads up! Your 401k match may not be available immediately. Although it’s your money, companies want to incentivize their employees to work for them for a certain amount of time before gaining access to the matched contributions. This is called the vested schedule. It works by giving an employee access to a percentage of the matched contributions every year until you put in enough time at the company to get the full amount. The good news is that the matched contributions will continue growing even during the vested period, so it may be worth staying with your company for a few more years to benefit from the free money you’ve earned!
The Simple Formula to Calculate Your 401k Match
Does your employer offer a 401k match to employees? You can use this simple formula to see how much free money (401K Match Amount) you will get from your employer every year.
401K Match Amount = Annual Salary x Contribution Percentage x Match Rate
Check out this 401k match example for a company offering a 100% match.
You’re an employee making $50,000 a year. Your employer offers a 100% match program up to a 5% wage contribution.
· Annual salary: $50,000
· Contribution Percentage: 5% (or 0.05)
· Employee Match Rate: 100%
Match Amount = $50,000 x 0.05 x 1.00 = $2,500 match paid to your 401k annually.
Here’s an example of a company offering a partial 401k match program:
You’re an employee making $80,000 per year. Your employer offers a partial match of 50% up to 6% of your salary.
· Annual salary: $80,000
· Contribution Percentage: 6% (or 0.06)
· Employer March Rate 50%
Match Amount = $80,000 x 0.06 x 0.50 = $2,400 match paid to your 401k annually.
How to Find Out if your Employer has a 401k Contribution Match
A 401k match program is one of the best benefits companies offer that substantially impacts your wealth building. Although it’s not money you’ll see directly on your paycheck every week, it’s money set aside by your company to help supercharge your wealth-building.
Not all companies offer this employee perk. Companies must disclose all of the information in the benefits package when you’re hired into the company. However, if you overlooked it or need a refresher on your current employee match program, here are a few places to learn more about it:
1. Ask your HR rep
2. Research online on your company’s official website or employee portal
3. Ask your boss
Many 401k match programs are opt-in. Employees must request to participate in the program. Make sure to do this after learning more information about your company’s program.
Take Action
Now that you understand what the 401k match is and how it can grow your wealth, it’s time to ensure you’re participating in this wealth-building strategy.
Here’s how to do it:
· Ask if your company has a 401k employee match program
· Request to participate in the program
· Make monthly contributions to your 401k
· Enjoy the free money!
Anyone can participate in an employee match program if your company offers it. Whether working minimum wage or a salaried position, you can benefit from this strategy.
If you are employed, Paycheck to Wealth considers a company 401k plan as one of the first things you should do to help secure your financial future especially if it has a company match. You should try to save as much as you can in your company’s 401k program, but at least you need to contribute the company match amount to take advantage of the free money available to you.
We’d love to help guide you through the steps of being part of your company’s employee match program. Whether you need help determining if your company offers the program or setting up your 401k account, contact Paycheck to Wealth today, and we’ll get you started!
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