A 401(k) match is like free money — here's how it works

When it comes to saving for retirement, a 401(k) plan is one of the smartest financial products you can utilize. Contributions to these employer-sponsored plans are tax-deferred, so they lower your taxable income and can put you in a lower tax bracket.

In addition, many companies that offer 401(k) plans will match some or all of their employees' contributions. That's essentially free money you can put toward your retirement.

Here's what you need to know about 401(k) employer matching, including how it works and what's considered a good match.

If your workplace has 401(k) matching, your employer contributes toward your plan. According to the Plan Sponsor Council of America (PSCA), 98% of companies that offered a 401 (k) in 2023 matched their employees' contributions to some extent.

There is usually a cap on this benefit, though: You might put 10% of your paycheck into your 401(k), for example, but your company only matches the first 5%.

Employer contributions can be a dollar-to-dollar or a partial match—say, 50 cents for every dollar you set aside.

The most common formula is a combination of the two, according to Nathan Boxx, director of retirement plan services at Fort Pitt Capital Group. Companies typically offer a full match up to 3% of an employee's salary, Boxx said, then a partial match of 50 cents for every dollar on the next 2%. Employee contributions above 5% typically go unmatched, he added.

While some employers will contribute at a flat rate, others require you to set aside a certain percentage before they will begin matching.

Vesting is the percentage of your 401(k) contributions that you own outright. Your contributions are always vested immediately but your company might require you to stay at your job for a set number of years to get 100% of the matching contributions. If you leave early, you could forfeit a percentage of that money.

When a plan vests all at once after a certain period, it's called "cliff vesting." If it vests gradually, it's known as "graded vesting."

Federal regulations require full vesting within six years. While more than 44% of plans offered immediate full vesting in 2021, according to PSCA, nearly 30% used graded vesting over five or six years.

Formulas used for 401(k) employer matches vary, but Boxx said a match of between 3% and 5% is "pretty much the meat of the bell curve."

Fidelity Investments is the nation's largest administrator of 401(k) plans, overseeing 24,800 plans as of March 2023. In the first quarter of that year, the average company match for Fidelity plans was 4.8% of a worker's salary.

The most common 401(k) match formula for Fidelity accounts was a dollar-for-dollar match on the first 3% and then 50 cents on the dollar on the next 2%.

If a worker contributed 5% of their salary, according to that formula, their employer would be contributing another 4% (or 3% plus half of 2%).

You can still save for retirement even if you don't have access to a 401(k). Anyone earning income can contribute to an individual retirement account (IRA), which lets you invest in stocks, bonds, mutual funds and other asset classes.

Traditional IRAs allow investors to contribute pre-tax dollars so their money grows tax-deferred and they pay taxes when they withdraw funds. Contributions to Roth IRAs are taxed before they're invested, so your money grows and can be withdrawn tax-free.

Charles Schwab offers both traditional and Roth IRAs, and has digital tools to help you decide which fits your needs best. There are no monthly service fees and no account minimums.

Vanguard offers hundreds of low-cost index mutual funds and exchange-traded funds, as well as spreadsheets for listing retirement expenses and retirement income.

Retirement experts recommend contributing at least as much as your company match. If your employer provides a dollar-to-dollar match up to 5%, for example, aim to contribute 5%.

You can work toward setting aside 15% of your income for retirement, but that depends on your age, financial situation and retirement goals.

The contribution limit on 401(k) plans in 2024 is $23,000, with workers 50 and older allowed to set aside an additional $7,500 to catch up on retirement planning.

But that cap doesn't include employer matching: In 2024, the limit on combined employee and employer contributions is $69,000.

If it's available to you, a 401(k) employer match should be a meaningful part of your retirement strategy. Try to contribute enough to maximize any match your company offers.

At CNBC Select, we work with experts with specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Nathan Boxx, director of retirement plan services at Fort Pitt Capital Group.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every retirement article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of investing products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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