After taxes and other deductions are taken out of your paycheck, you might feel like you don’t have enough money left to be able to save for retirement. But if your employer offers a 401(k) plan with a match, you’re missing out on free money. Having a 401(k) is already a smart move because it’s a tax-advantaged retirement account. Your contribution gets funneled over to your retirement savings before taxes are taken out of your paycheck, so once you get used to the adjustment, you won’t even notice that your checks are a bit smaller. If your employer offers a match, they’ll typically offer it up to a certain percentage of your salary. That means that you can contribute as much of your salary to your 401(k) as you want (up to the annual limit), but your employer will only match a certain percent of that.
For instance, imagine you make $40,000 and contribute 3 percent of your salary to your 401(k). You’ll contribute $100 per month. If your employer matches up to 3 percent of your salary, your employer will also contribute $100 per month. Now imagine you contribute 5 percent of that same salary to your 401(k), which comes out to $167 per month. But your employer will only contribute $100 per month—3 percent of your salary.
On the other end of the spectrum, if you don’t contribute up to the employer match limit, you’re missing out on free money. Picture that same salary. If you only contribute 2 percent, you and your employer each only contribute $67 each month. That’s like leaving a $33 bonus from your boss on the table. A few percent may not seem like a big difference, but your larger contribution will really add up.