What is 401(k) matching and how does it work?

Tax season is nearly over. It’s a great time to take advantage of all the benefits your employer offers, especially those that put free money in your pocket. One such benefit is a 401(k) match. But what exactly is it, and how can you maximize it?

A 401(k) match is essentially a bonus program for your retirement savings. When you contribute a portion of your paycheck to your 401(k), your employer might add extra money to your account, essentially matching your contribution, up to a certain limit. It’s like getting free money for your future self!

Here’s how it typically works: Employers offer a match based on a percentage of your contribution. For example, a common match might be 50% for every dollar you contribute, up to 6% of your salary. So, if you contribute 6% of your salary, your employer would add an additional 3% (50% match on 6%) to your 401(k).

There are two key things to remember about 401(k) matches:

Contribution limits

There’s a limit to how much you can contribute to your 401(k) each year. In 2024, it’s $23,000. The match percentage applies only to a portion of your salary, typically up to a certain percentage.

Match formulas

Matching formulas can vary. Some employers offer a dollar-for-dollar match up to a limit, while others might offer a higher match percentage for lower contribution rates. Be sure to understand your specific plan’s details.