Matching Contributions

Matching Contributions — Getting paid to save for your own retirement


Matching Contributions — Getting paid to save for your own retirement

When you were a kid, your parents may have used a strategy to encourage you to put money in your piggy bank: matching every dollar you saved with a dollar of their own.

Striking a match

Many employers use a similar incentive in their retirement plans. They will match a portion of whatever you contribute to your retirement plan account. Some match dollar-for-dollar up to a certain percentage of pay. Others may match a portion of each dollar you put in, say, 50 percent. Regardless, it’s free money. Having your employer contribute right along with you can make your retirement account grow even faster than if you were the only one saving.

Let’s say you work for an employer who matches your 401(k) contributions dollar-for-dollar up to 6 percent of your $45,000 salary. If you save 6 percent of your pay, that’s $2,700 you’re putting away for your retirement. But your employer contributes the same amount, making your annual retirement contribution $5,400. If you saved less than 6 percent, you’d be leaving some of that “free money” on the table. It’s awfully hard to walk away from someone offering to contribute money into your retirement savings account.

Keeping it close to the vest

While an employer match goes right into your account, where it has the opportunity to grow along with your own contributions, you may not have immediate access to that money if you were to leave your employer.

Many employers set up a system for you to gain ownership of your matching funds over time. This process is called vesting and it comes in two varieties. A graduated vesting schedule may give you increasing ownership of the funds over three to six years. A cliff vesting schedule may withhold ownership until you’ve completed a certain number of years of service, at which point you become 100 percent vested.

Vesting is a way for your employer to encourage you to stay with the organization. Once your employer’s contributions are fully vested, you have control over the money and can take it with you if you leave your employer. By the way, you’re always immediately 100 percent vested in your own contributions.

Max out your match

If your employer plan offers matching contributions, it just makes sense to save at least up to the match limit. It’s a great way to turbo charge your savings and help your account grow.