A 401(k) match is one of the sweetest perks an employer can offer, but if you're just throwing a random sum into your account each month, you might be missing out on an opportunity to earn more. Familiarizing yourself with the terms of your 401(k) match is key to squeezing the most out of this benefit. Here are a few questions to ask yourself to see how much you already know.
1. How does your company's 401(k) match work?
A 401(k) match is based on a formula, which varies from company to company. Most commonly, employers will give you either $1 or $0.50 for every dollar you contribute to your 401(k), up to a certain percentage of your salary.
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This formula can change over time, and your employer can suspend it also, but you'll usually have some warning before this happens.
If you hope to claim your 401(k) match for 2022, you must be sure to contribute enough money this year. Once 2022 is over, the opportunity to earn that match is gone forever, though you can still set aside funds in your 401(k) to earn your match for subsequent years.
2. How much is your 401(k) match worth?
Since a 401(k) match is usually tied to your salary, everyone's match is a little different. Once you know your company's matching formula, it's pretty easy to figure out your maximum match.
If you qualify for a dollar-for-dollar match on up to 3% of your income and you make $50,000 per year, your maximum match would be 3% of your income, or $1,500. You'd have to contribute $1,500 of your own money, and then your employer would do the same. If you had a $0.50 on the dollar match up to 6% of your income, you'd also get up to $1,500 from your employer, but you'd have to contribute $3,000 of your own money first.
You're always welcome to contribute even more to your 401(k). The maximum contribution for 2022 is $20,500, or $27,000 if you're 50 or older. But if you exceed the income cap used in your matching formula, you won't get any additional cash from your employer.
3. What's your 401(k)'s vesting schedule?
All 401(k)s with matches have vesting schedules that determine when you're eligible to keep your match if you leave the company. While immediate vesting is an option with some companies, most require you to work for the employer for a few years before you become vested.
The two most common types of vesting schedules are cliff and graded. Cliff vesting schedules don't allow you to keep any of your employer match if you quit before you've worked for the company for a set number of years -- usually three or less.
Graded vesting schedules release your employer-matched funds to you gradually over time. You might get to keep 20% of your funds if you quit after one year, 40% after two years, and so on. Vesting schedules like these can be a bit longer -- up to six years in some cases.
The vesting schedule shouldn't be a problem for you if you've already been with your employer for a long time. But if you're new or thinking about leaving after a few years, it's a good idea to understand the vesting schedule so you can weigh the potential effects of your decision on your finances.
If you don't know the answer to any of the above questions, talk with your company's HR department. Record the information somewhere so that you'll have it on hand for later and keep an eye out for any future changes to your matching formula.
