Employer Match

Breakdown

You got a new gig and they're offering you an employer match for your 401(k), what does it mean, how do I do it, why should I do it? We'll get into the why's here shortly and tackle the 'what' it is here first. Typically an employer will match something like 'X% up to Y%', so if they say they'll match 50% up to 6% that is another annoying finance word choice that basically translates to "We'll match 3%, but you've got to contribute at least 6% for us to do that".

So, what exactly are they matching? Your pre-tax dollars from your paycheck. We finally get to stick it to Uncle Sam (until we need it in retirement... dude always gets his cut eventually) and take a portion of that perfect paycheck and throw it into a retirement account before he gets his grubby claws on it (state/federal taxes + social security). Your employer then puts in a contribution of their own based on that match percentage you signed up for when you got hired.

You'll hear a lot of people say "it's free money!", but it does actually cost you in that by contributing to retirement you're not getting dollars in hand at the time. Obviously I'm going to advocate for you getting your full employer match, but I always thought that was a weird way of putting it as it most definitely costs you something. An additional excellent benefit of an employer match is that if you are in a position to fully max out your 401(k) every year (2024: $23,000/year) then the contribution from your employer does NOT go toward that, so you effectively get to overfill your retirement contribution.

If you are willing and able to contribute to your 401(k), there is absolutely no reason to not try and hit the maximum match percentage from your employer - it isn't necessarily free, but if you are going to contribute anyway, then I would say your minimum contribution should be hitting that percentage to get your full employer match.

Less immediate advantages

In addition to the money your employer contributes to your account every paycheck, there's also the fact that by taking the money from your pre-tax paycheck, that your taxable income is lowered as that number is calculated on.. well, your taxable income - and that 401(k) contribution is not taxable. So you reduce your taxable income, you reduce your taxes for the year - neat.

Probably the biggest advantage is the fact that by going into a retirement account, that money is expected to earn interest over time. Compound interest is a very powerful tool in building wealth over long periods of time, so that extra few percent that your employer matches can end up turning into a good chunk of money by the time you get to use it.

Quick example

Not rocket surgery here, but let's say (using our same example of employer match at 50% of 6% otherwise known as a 3% match):

• You make $50,000 a year

• You decide to contribute 6% of your salary ($3,000) to your 401(k)

• Your employer will add another 50% of that amount ($1,500) to your account

• Now instead of just having $3,000, you have $4,500 in your retirement account

• Your taxable income falls by the $3,000 you contributed and is now at $47,000 (when you do your taxes, you get to use this number instead of the full $50,000)

Wrap up

Keep in mind that the 3% match is just an example; you'll need to check with your employer to find out their specific rate (if they even offer one) to get accurate information. Remember, it's not necessarily 'free' money. For instance, if you're saving for a house and decide to pause your retirement contributions, you'd potentially get a significant boost to your ability to save that down payment quicker. That being said, if it's financially feasible, I strongly believe that meeting at least the employer match is greatly beneficial in the long run.

Thanks for reading!

Jake

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