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Receiving matching contributions to your retirement plan from an employer is one of an employee’s best benefits for making the most out of their 401(k) plan. In addition, maximizing matched contributions will help grow your retirement plan faster.
Essentially, a matching contribution is the amount given by an employer whenever you contribute to your retirement plan. For example, suppose you use a 401(k) plan as a retirement savings vehicle. Your employer would make a matching contribution for every contribution you make to the plan in such a case.
Every employee contributing a specific percentage of their income to their chosen retirement plan will receive a match from the employer for the same amount. An employer’s matching contribution is essentially free money for the employee since they do not earn it themselves.
A typical example of a matching contribution occurs through a 401(k) retirement plan. Under this plan, an employee contributes a certain percentage of their income to a designated fund to get future retirement benefits and tax advantages on the contributed amount.
For example, an employer’s matching contribution can be 50% of an employee’s contribution, limiting to 6% of their salary.
Suppose your annual salary is $40,000, and you contribute $2,000 towards your 401(k) plan every year. Then, your employer’s matching contribution would be 50% of your contribution, i.e., $1,000 (50% of $2,000), subject to a cap of 6% of your annual pay, i.e., $2,400 (6% of $40,000).
Matching contributions are not legally required, and not all employers provide this benefit. Still, it is usually the norm for employers to provide some matching contribution to boost an employee’s retirement benefits.
You can find matching contributions usually in 401(k) plans, although other retirement benefit programs, like simple IRAs, make use of them.
401(k) plans are primarily two types:
Matching contributions can be:
When you choose to contribute to a 401(k) plan, a matching contribution by your employer can allow you to multiply your savings to meet your retirement goals.
You can take the following steps to make the most of the contributing matches:
Your employer’s matching contribution to your 401(k) plan provides you with free money that can help secure your retirement in the long run. So make sure to contribute to get the maximum advantage out of it.