A retirement plan with an employer match is usually the best place to save money for your golden years. That’s especially true if you stash enough cash in the account to get the full match.
Yet plenty of workers pass up this “free money” by not maxing out their employer match. In fact, 23 percent of folks who are saving money in a workplace retirement plan such as a 401(k) don’t even know the match formula at their workplace, according to an Empower Institute survey released last year.
Not knowing that formula — or not knowing the contribution limit for any type of retirement account — can cost you thousands of dollars every year.
How to max out an employer match
If you don’t know your employer’s match formula, you can’t plan your own contributions to ensure you get the full match each year. So, folks who don’t know that formula can easily lose out on a lot of free retirement money.
To remedy this, start by finding the employer match formula: Log in to your retirement account, comb through the paperwork or ask your employer’s human resources department where to find the formula.
It will probably sound something like this: “The employer matches 100 percent of employee contributions, up to 6 percent of the employee salary.”
You should be able to break down your formula into two elements:
- The percentage of your contribution the employer matches: A 100 percent match, for example, means your employer will contribute $1 for every dollar you contribute.
- The percentage of your salary the employer matches: A 6 percent salary match means the employer will contribute up to that amount. So, if you earn $50,000 per year, your employer will contribute up to $3,000 to your retirement plan each year — unless there is a lower cap.
In the second example above, you have to contribute $3,000 to your employer-sponsored retirement account each year to get all of that $3,000 from your employer each year.
So, if you receive monthly paychecks — that is, 12 paychecks in a year — you need to contribute $250 per paycheck to get the full match.
Confirm that you have enough money withheld from your paycheck to snag all of the free $3,000 match. You should be able to do this by logging in to your account online.
How to max out any tax-advantaged retirement account
To maximize any tax-advantaged retirement account — including a 401(k), individual retirement account (IRA) or health savings account (HSA) — you also need to know the contribution limit.
Such accounts are subject to IRS rules that establish a maximum amount of money the government will allow you to contribute each year.
Contribution limits depend on the account type and your age. The federal government also increases the limits periodically to keep up with inflation.
The current contribution limits for 401(k)s, for example, are $19,000 for folks age 49 and younger, and $25,000 for those age 50 and older.
We detail other contribution limits in “Limits for 401(k), IRA and Other Retirement Plans to Rise in 2019.”
To learn more about tax-advantaged accounts, check out “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”
Do you know your employer match formula? Share your experience with maxing out the match by commenting below or over on our Facebook page.