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Your employer is offering you free money through the 401(k) match. If you are not contributing enough to get the full match, you are leaving thousands of dollars on the table every year.
Here is the best deal in personal finance: your employer will give you free money if you put money into your 401(k). Not a loan. Not a perk you have to earn. Free cash deposited into your retirement account, just for participating.
This is called the employer match, and according to the Bureau of Labor Statistics, about 86% of 401(k) plans offer one. The most common match formula is 50% of your contributions up to 6% of your salary. In plain English: if you earn $60,000 and contribute 6% ($3,600/year), your employer adds another $1,800. That is an instant 50% return on your money before it even touches the stock market.
Yet a Vanguard study found that roughly 25% of employees with access to a match do not contribute enough to get the full amount. On a $60,000 salary with a 50%-of-6% match, that is $1,800/year left unclaimed. Over a 30-year career with 7% growth, that unclaimed match alone would have grown to roughly $170,000. Do not be one of those people.
What is a 401(k)?
A 401(k) is a retirement savings account offered by your employer. The name comes from Section 401(k) of the US tax code. It works like this: you choose a percentage of your paycheck to contribute, that money is deducted before you receive it, it goes into your 401(k) account where you invest it in funds offered by your plan, your employer may add extra money on top (the match), and the account grows tax-advantaged until you withdraw in retirement.
There are two flavors:
Traditional 401(k): Contributions are pre-tax. If you earn $60,000 and contribute $6,000, your taxable income drops to $54,000. You pay less income tax today. The trade-off: you pay income tax on every dollar you withdraw in retirement.
Roth 401(k): Contributions are after-tax (no tax break today), but all withdrawals in retirement are tax-free, including the growth. Same concept as a Roth IRA, but through your employer with higher contribution limits.
Many employers now offer both. We will cover which to choose later.
How the employer match works
The match is your employer’s contribution to your 401(k) on top of your own. Common formulas:
Dollar-for-dollar up to X%. 100% match up to a certain percentage. Example: 100% match up to 3% means if you contribute 3%, they add 3%.
50 cents on the dollar up to X%. 50% match up to a certain percentage. Example: 50% match up to 6% means if you contribute 6%, they add 3%.
Tiered match. Different rates at different levels. Example: 100% of the first 3%, plus 50% of the next 2%.
The minimum contribution to get the full match is the most important number in your financial life right now. Log into your 401(k) plan (or ask HR) and find your match formula. Set your contribution percentage to at least that level.
| Salary | Match formula | You contribute | Employer adds | Free money/year |
|---|---|---|---|---|
| $45,000 | 50% of 6% | 6% ($2,700) | 3% ($1,350) | $1,350 |
| $60,000 | 50% of 6% | 6% ($3,600) | 3% ($1,800) | $1,800 |
| $75,000 | 100% of 4% | 4% ($3,000) | 4% ($3,000) | $3,000 |
| $90,000 | 100% of 3% + 50% of next 2% | 5% ($4,500) | 4% ($3,600) | $3,600 |
See how much your 401(k) can grow:
401(k) Retirement Calculator
Try this: set salary to $60,000, contribution to 6%, match to 3%, current balance to $0, years to 30, rate to 7%. Then change the contribution from 6% to 3% (below the match threshold) and see how much you lose.
What about vesting?
Your employer’s match may not be fully yours immediately. Many companies use a vesting schedule, meaning you gradually earn ownership of the match over time.
Immediate vesting: The match is 100% yours from day one.
Cliff vesting: You own 0% until a specific date (usually 3 years), then 100%. If you leave at 2 years and 11 months, you lose the entire match.
Graded vesting: Ownership builds gradually. Typical schedule: 20% after year 1, 40% after year 2, 60% after year 3, 80% after year 4, 100% after year 5.
Your own contributions are always 100% vested immediately. Vesting only applies to the employer match.
This matters for job decisions. If you have $10,000 in unvested match, factor that into your decision. Sometimes waiting 3 extra months to vest is worth thousands of dollars. Check your plan documents or ask HR.
What to invest in inside your 401(k)
Your 401(k) does not pick investments for you. You need to choose from the menu your plan offers.
Target-date funds (recommended for beginners). Named by retirement year: “Target 2055,” “Target 2060,” etc. Pick the one closest to the year you plan to retire. The fund automatically holds a mix of stocks and bonds and gradually shifts toward bonds as you age. One fund, zero maintenance. Best option for most people.
Index funds. If your plan offers an S&P 500 index fund or total stock market index fund with an expense ratio under 0.10%, this is excellent. See our index fund guide for how to build a simple portfolio.
Actively managed funds. Funds where a manager picks stocks trying to beat the market. These charge higher fees (often 0.50% to 1.50%) and rarely outperform index funds over the long run. Avoid these unless your plan has no index options.
Company stock. Keep this under 10% of your 401(k). You already depend on your employer for your paycheck. Do not also have your retirement savings concentrated in the same company.
The decision for most beginners: pick the target-date fund closest to your retirement year and put 100% of contributions there.
Traditional 401(k) or Roth 401(k)?
Choose Roth 401(k) if:
- You are in the 12% or 22% bracket now (most people earning under $95,000 single)
- You expect your income and tax rate to increase over your career
- You already have a Roth IRA and want to maximize tax-free retirement money
Choose Traditional 401(k) if:
- You are in the 32%+ bracket and want the tax deduction now
- You expect to be in a lower tax bracket in retirement
Not sure? Split it. A 50/50 split gives you tax diversification without having to predict the future.
Important: regardless of whether you choose Traditional or Roth for your contributions, the employer match always goes into the Traditional (pre-tax) bucket. This is an IRS rule.
2026 contribution limits
- Under age 50: $23,500 per year (your contributions only; employer match does not count toward this limit)
- Age 50 and over: $31,000 per year (includes $7,500 catch-up contribution)
- Total combined limit (your contributions + employer match + any after-tax contributions): $70,000
These limits are set by the IRS and typically increase slightly each year with inflation. Check IRS.gov for the most current figures.
What happens to your 401(k) when you change jobs?
You have four options when you leave an employer. Full details in our 401(k) rollover guide, but the short version:
- Roll into a Traditional IRA (recommended for most) — best investment options and lowest fees
- Roll into your new employer’s 401(k) — keeps everything consolidated
- Leave it in the old plan — okay temporarily, problematic long-term
- Cash it out — triggers taxes and a 10% early withdrawal penalty. Never do this.
Common 401(k) mistakes
Not enrolling at all. Some employers auto-enroll you at a low default contribution (often 3%). Others require you to actively enroll. If you are not sure whether you are enrolled, check with HR today.
Contributing exactly the match amount and stopping. The match is a floor, not a ceiling. After securing the match, the next step is funding your Roth IRA, then increasing your 401(k) contributions as your income grows.
Leaving the default investment selection. Many plans default new employees into a money market fund or a conservative option. If you did not actively select a target-date fund or index funds, log in and check what your money is actually invested in.
Cashing out when switching jobs. The 20% federal tax withholding plus 10% early withdrawal penalty means you lose roughly 30% or more of the balance immediately. A $30,000 account becomes roughly $21,000 in your pocket. And you lose all future compound growth on that money.
Ignoring fees. Some 401(k) plans have high-cost actively managed funds. Compare the expense ratios of the funds in your plan. If the cheapest fund is a target-date fund with a 0.15% expense ratio and the alternatives all charge 0.80% to 1.50%, stick with the target-date fund.
Frequently asked questions
When can I start withdrawing from my 401(k)?
You can withdraw without the 10% early withdrawal penalty starting at age 59.5. Required minimum distributions (RMDs) start at age 73 for Traditional 401(k)s (under SECURE 2.0 rules). Roth 401(k)s also required RMDs until 2024, but SECURE 2.0 eliminated RMDs for Roth 401(k)s.
Can I borrow from my 401(k)?
Most plans allow loans up to 50% of your vested balance or $50,000, whichever is less. The loan must be repaid with interest (usually Prime + 1%). If you leave your job with an outstanding loan, you typically must repay it within 90 days or it becomes a taxable distribution. Borrowing from your 401(k) should be a last resort, not a routine financial tool.
What is a Roth 401(k) vs a Roth IRA?
Both grow tax-free and offer tax-free withdrawals. Key differences: Roth 401(k) has higher contribution limits ($23,500 vs $7,000), no income limits, is offered through employers, and previously required RMDs (now eliminated by SECURE 2.0). Roth IRA has lower limits, income limits for direct contributions, is opened independently, has no RMDs, and allows withdrawal of contributions anytime without penalty. Many people use both.
The bottom line
Getting your full employer match is not optional — it is the highest-return investment you will ever make. After that, the 401(k) is a powerful tax-advantaged tool that, combined with a Roth IRA, gives you both tax reduction today and tax-free income in retirement.
Enroll, contribute at least the match percentage, select a target-date fund, and automate it. The whole setup takes 20 minutes and pays dividends for decades.
Open a Roth IRA alongside your 401(k) todayNext steps:
- Want to open a Roth IRA alongside your 401(k)? Read our Roth IRA guide — that is Step 2 after the employer match.
- Changing jobs and need to move your 401(k)? Read our 401(k) rollover guide to avoid the taxes and penalties that catch most people.
- Trying to figure out how much you need for retirement? Read our FIRE movement guide — even if you do not plan to retire early, the math for your retirement number is there.
