Putting money into a 401k is a great way to save for your retirement, because of the big contribution limits, and the convenience of having money taken out of your paycheck at work for contributions. One of the biggest advantages of putting money into this type of account is that you can get employer matched contributions. What exactly are employer matched contributions and why do they matter?
How They Work
Every employer does matching contributions a little bit differently. Many of them do a match up to a certain percentage of your contribution. An employer might put in the same amount as you do, with a limit. Sometimes the amount that the employer will contribute is only half of what you do, depending on the rules of the plan. For example, imagine that you put 8 percent of your income into the account for the year. Your employer would then put in 4 percent of your annual income. This means that 12 percent of your income has now been put into a 401k, and you only had to put in 8 percent. On top of that, you contributed your money before taxes were taken out, which means that it didn’t really seem like you were putting that much money into the account anyway.
Rules of the 401k
Your employer isn’t required to make any contributions to your account. They are totally voluntary. When the company originally sets up the 401k, they get to set the rules for the account. At that time, the company will put the rules about matching into the rules of the 401k. Most of the time, the company will still make the contributions discretionary. This means that the company can look at how well it did for the year, and then decide whether it wants to make a match.
If you have a 401k, you have the opportunity to get free money for your retirement. This means that if you have a 401k available to you at your employer, and you are not participating, you’re leaving money on the table. Start contributing to a 401k as soon as possible, so that you can get free money for your retirement.