You may be walking away from free money by not contributing to your employer-sponsored retirement plan. Many retirement plans, such as SIMPLE IRAs and 401(k)s, provide that your employer will match some portion of the amount you contribute to your retirement account. The plan document and the summary plan description will state the conditions for you to receive matching contributions.
- are contributions your employer makes to your retirement plan account if you contribute to the plan from your salary,
- don’t reduce the amount you can contribute to the plan from your salary,
- grow tax-free while in the plan, and
- are taxable only when withdrawn from the plan.
An example of a 401(k) plan matching formula is 50% of your contributions up to 5% of your annual salary (the amount of your salary that can be used in this calculation is limited - see the cost-of-living adjustments).
Example 1: You contribute $1,200 from your $30,000 annual salary to your company’s 401(k) plan. Your employer’s 50% match on your contributions up to 5% of your salary means an additional $600 (50% x $1,200) would be added to your retirement account for the year.
Example 2: You contribute $2,000 from your $30,000 annual salary to your company’s 401(k) plan. Your employer’s 50% match on your contributions up to 5% of your salary means an additional $750 ($1,500 X 50%) would be added to your retirement account for the year. Note, that the matching contribution is not $1,000 because the plan’s match is capped at 50% of the contributions you make up to 5% of your salary ($30,000 x 5% = $1,500 and $1,500 X 50% = $750).
How do I receive matching contributions?
You must participate and contribute to the plan from your salary. Generally, the more you contribute to the plan, up to the plan’s match limit, the more you receive in matching contributions.
How do I find out about my plan’s matching contributions?
The retirement plan information your employer gave you will tell you how long you have to work before receiving these contributions, the matching formula and how much you have to contribute to fully benefit from the match.