Determining the Limits of Your Company 401k Match

Many employers provide a variety of employee benefits in order to promote loyalty and retention with employees, such as a company 401K match. A company 401K match program is when a company agrees to match employee contributions, up to a certain percentage of initial contributions. For example, a company can offer to match fifty percent of the first ten percent of an employee’s pre-tax salary. If the employee contributes earns $100,000 pre-tax dollars, the employer will match contributions up to the first $5,000.

The Benefits of Maximum Employee Contributions

In the above example, an employer will match a $5,000 investment by an employee into their 401K. However, as of 2009, an employee can contribute up to a total of $16,500 into a 401K per year, including the value of the employer's match. Thus, in the example above, the employee in the above example may contribute up to $11,500, while the company contributes the other $5,000. It is always beneficial for an employee to contribute the maximum to their 401K because of the tax benefits of the retirement account itself. The combination of tax deferral and compounding growth allows for exponential growth over time, and this growth is amplified with larger sums of money.

Taking Advantage of the Company Match

If an employee cannot contribute the maximum allowable amount of $16,500, which is set by the IRS, they should at the very least contribute up to the company’s match amount, because this is free money. Some employers will even grant the full match on any amount of employee contributions up to the ceiling amount. For example, in the above example, if an employee contributed $1,000 to their 401K for the year, the company may still match with a $5,000 contribution. Other firms, however, will only match with an amount identical to an employee’s contribution up to the ceiling amount. Another way firms can match contributions is with company stock. This can create diversification risk.

 The Benefits of Saving for Retirement Early

Employees take part in retirement matching incentives for two reasons. The first is that the more cash in the retirement account, the greater the benefits of compound interest. Contributing an extra few thousand dollars today can result in an extra thirty or forty thousand upon retirement. The second reason is that the longer a retirement nest egg has to grow, the less sensitive returns are to market volatility risk.

For example, if you are looking to retire in 2010, and the crash of 2008 brought your retirement account value down to $100,000, from $300,000, you may find yourself working an extra five or ten years. However, if you are an investor that is looking to retire in 2020 or 2030, your 401k has plenty of time to fully recover and grow.