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Retirement Isn't Free—But Your 401(k) Match Is

Folded Hundred Dollar Bills on a Wooden Table

Are you making the most of your company's 401(k) match? Each year, Americans leave billions of dollars in 401(k) company matches on the table. Take steps today to make sure you aren't one of them by making the most of your company's 401(k) match.

In addition to offering
the potential for free
money through a match,
retirement plans can
give you significant
tax advantages.

Here are four steps to make sure you aren't one of the estimated one-of-four employees missing out on free money.

Understand the Value of an Employer Match

A 401(k) or similar employer-sponsored retirement plan can be a powerful resource for building a secure retirement—and an employer match can add a substantial amount to your nest egg. Let's assume you are 30 years old, make $40,000 and contribute 3 percent of your salary—$1,200—to your 401(k). And, for the sake of this example, let's assume you continue to make the same salary and the same contribution each year until you are 65. After 35 years, you will have contributed $42,000 to your 401(k).

Now let's assume you get a match from your employer. One of the most common matches is a dollar-for-dollar match up to 3 percent of the employee's salary. Taking full advantage of the match literally doubles your savings, even assuming no increase in the value of your investments: Instead of having set aside $42,000 by the time you retire, you will have set aside $84,000, with $42,000 in free contributions. Look at it this way: it's a no-cost way for you to increase your contributions by 100 percent.

In reality though, the impact will be even bigger than that. That's because when you invest money its value compounds. Check out The Time Is Now: The True Value of Time for Young Investors to learn how taking full advantage of a match early in your career can add up.

Recognize the Tax Advantages

In addition to potentially offering free money through a match, employer-sponsored retirement plans can give you significant tax advantages.

Contributions to tax-advantaged retirement accounts, such as a 401(k), are made with pre-tax dollars. That means the money goes into your retirement account before it gets taxed*. Plus, your contributions, any match your employer provides and any earnings in the account (including interest, dividends and capital gains) are all tax-deferred. That means you don't owe any income tax until you withdraw from your account, typically after you retire.

RELATED: What Does It Mean to Be Pre-Tax or Tax-Advantaged?

With pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you will owe less in income taxes for the year. But your take-home pay will go down by less than a dollar.

Here's how that works. Building on the example above, the $1,200 you contribute to a traditional 401(k) lowers your federal income tax bill for the year because you would then owe taxes on only $38,800 rather than $40,000. If you're single and take the standard deduction of $12,000, your total federal tax bill using the 2018 IRS tax rate schedule would be $3,025.50. That compares with the higher tax bill of $3,169.50 if you did not contribute—a tax savings of $144.

Matches and Roth 401(k)s

A growing number of employers offer a Roth 401(k) option, where employees make contributions with after-tax money—and neither the contributions nor any earnings they generate are taxed down the road when the money is withdrawn. While employers can match Roth-directed contributions, IRS rules require that all matched funds reside in a pre-tax account, just like employer-contributed matching funds in a traditional 401(k) account.

As a consequence of this rule, the matching funds your employer contributes to your Roth 401(k) (and any earnings on those funds) will be taxed as ordinary income when you withdraw them. If you contribute to both a Roth and a traditional 401(k), the match is applied first to the traditional 401(k) amount and then, if necessary, to any Roth-directed funds.

Play Catch Up

Not all employers provide matches—so if you are uncertain, ask your company's human resources or benefits department. Find out what the maximum percent of salary your company will match—and increase your contribution amount if you find that you are not contributing enough to achieve the full match.

Also be aware that even contributing at the match threshold may not be enough to fund a secure retirement. Most investment professionals recommend a savings level of 10 percent or more of your income annually to generate enough replacement income during retirement to maintain your standard of living—and to start saving at this level as soon as you begin working. Use FINRA's Save the Max calculator to see if you are on track to save the $18,500 maximum ($24,500 if you are 50 or older) in your 401(k) this year.

The bottom line is that it makes no sense to pass up free money. A company match:

  • Increases your retirement savings for free without incurring any risk. Remember: you can, and probably should, contribute more than the match threshold.
  • Offers the potential for tax-deferred compounding of that larger sum over time—specifically, your contributions plus the amount of the company's match.
  • Reduces the risk of falling short of the savings necessary to fund a secure retirement.

For more information about smart strategies for saving for retirement, visit the Retirement section of And subscribe to FINRA's The Alert Investor newsletter for more information about saving and investing.

*You pay Social Security (FICA) and Medicare taxes on your 401(k) contributions, but not on any matching employer contributions. See: Retirement Plan FAQs Regarding Contributions—Are Retirement Plan Contributions Subject to Withholding for FICA, Medicare or Federal Income Tax?