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WalletPrep worksheet · Investing

How does a 401(k) employer match work?

Name ____________________ Date __________

Key ideas

  1. The formula has a rate and a cap. "50% of up to 6%" means 50 cents per dollar you put in, on up to 6% of your pay.
  2. Contribute up to the cap, at least. On a $50,000 salary, 6% is $3,000 and the match is $1,500. At 3%, Priya would leave $750 a year behind.
  3. Matched money may need time to vest. Your own money is always yours. Employer money can take up to 3 to 6 years to vest, meaning become fully yours.

Vocabulary

401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
Employer match
Money your employer adds to your retirement plan when you contribute, up to a set percentage of your pay.
Vesting
The rules for when your employer's contributions to your retirement plan become fully yours to keep if you leave the job.
APR
Annual percentage rate: the yearly cost of borrowing money, shown as a percentage. It is the number to compare on cards and loans.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
Minimum payment
The smallest amount you must pay on a credit card or loan by the due date to keep the account in good standing.

Work it out

Priya earns $50,000 a year. Her plan matches 50% of up to 6% of pay. She has been contributing 3% and wonders what she is missing.

  1. Salary
  2. Priya at 3%
  3. Match (50% of $1,500)
  4. Yearly total at 3%
  5. Priya at 6%
  6. Match (50% of $3,000)
  7. Yearly total at 6%
  8. Extra match from 3 more points

Check yourself

  1. You earn $60,000 and your plan matches 100% of up to 4%. How much is the full match?

    • A. $1,200
    • B. $2,400
    • C. $3,600
    • D. $4,800

  2. Which money in your 401(k) is always 100% yours?

    • A. Your own contributions
    • B. The employer match
    • C. Profit-sharing money
    • D. None of it until you retire

  3. When does it usually make sense to skip the match for now?

    • A. When you have a car loan
    • B. When the market is down
    • C. When you can't cover essential bills
    • D. When the match is only 50%

Your turn

Log in to your benefits portal and find your match formula, your current contribution rate and your vesting schedule. If your rate is below the match cap, raise it to the cap.

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Answer key

How does a 401(k) employer match work?

Work it out

  1. Salary$50,000
  2. Priya at 3%$1,500
  3. Match (50% of $1,500)$750
  4. Yearly total at 3%= $2,250
  5. Priya at 6%$3,000
  6. Match (50% of $3,000)$1,500
  7. Yearly total at 6%= $4,500
  8. Extra match from 3 more points$750
  1. At 3%, Priya puts in $50,000 × 3% = $1,500. Her employer adds $1,500 × 50% = $750.
  2. At 6%, she puts in $50,000 × 6% = $3,000, and the match doubles to $3,000 × 50% = $1,500.
  3. The extra $1,500 she contributes brings in $750 more in match, a 50% boost on day one. Going past 6% adds no more match.

Check yourself

  1. B. $2,400 $60,000 × 4% = $2,400 from you, and a 100% match adds $2,400.
  2. A. Your own contributions Your own contributions are always fully vested. Employer money can follow a vesting schedule.
  3. C. When you can't cover essential bills Essentials and minimum payments come first. Once those are covered, the match usually beats paying extra on debt.