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The typical matching formula is 50 cents on the dollar up to the maximum employer contribution. Therefore, for every $1 of employee contribution, the employer matches 50 cents making the total contribution to the 401K in this example to be $1.50.
While some employers permit less, many employers allow their employees to contribute up to 15% of their salary to the company's 401K plan. This means that the employee can contribute up to 15% of his paycheck in pre-tax dollars to the 401K plan with a maximum contribution of $15,500 in 2008 and $16,500 in 2009.
The employer matching percentage is typically less than 15% and is often in the 6% to 8% range. This means that although you may contribute 15% of your salary to the company 401K plan, the employer will only match 6% or 8% (whatever is specified in the plan) of the employee's contribution. This is the reason why many employees contribute only up to the employer matching percentage, even though they are allowed to contribute more of their paycheck to the 401K plan. - The benefits of participating in an employer matched 401K program are tremendous. Basically, employees get free money from their employer by putting some of their own money into the company's 401K plan. As an added benefit, the employee gets tax advantages because your money can grow tax-deferred. In other words, the contributions are made tax-free, and you are only taxed upon withdrawal.
- The most common 401K employer matching plan allows the employee to choose the makeup percentage of their investments. The employee is usually offered an assortment of investment options, often in mutual funds offering stocks, bonds, money market securities or a mix of these.
- Employer matching of 401K funds is not required by law. The employer contribution is completely voluntary.
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The owner of a 401K plan is subject to minimum distribution requirements. These minimum distribution requirements come into play within one year following the year that the account holder turns 70 1/2 years of age.
It may also take a few years to be 100% vested in your 401K plan. In this sense, vesting means the amount of time you must work to be entitled to all your accrued 401K benefits. In most companies, it takes between 5 and 7 years to become 100% vested. - There are maximum annual contributions with 401K plans. The limit for 2008 is $15,500, while the limit for 2009 is $16,500. The maximum contribution may be adjusted for inflation in upcoming years. Catch-up contributions up to $5,000 are allowed for employees who are 50 years of age or older.
- A great thing about 401K plans is that you can take your money with you. Should you get laid off or voluntary change employers, your 401k account can be rolled over to your new employer or any other qualified 401K plan.
Comments
tjtaylor said
on 10/12/2009 You state: "In most companies, it takes between 5 and 7 years to become 100% vested." This is misleading. All employee contributions are always 100% vested, as are any related earnings. Employer contributions however, often vest using a cliff or graduated vesting schedule. A cliff vesting schedule makes an employee 100% vested after a specific number of years, usually three. A graduated schedule provides an employee an increasing percentage over time. This must be equal to or better than two to six years. (i.e. 20% after 2 years, 40% after 3 years, up to 100% after 6 years). If the employer uess an automatic enrollment feature, after 2007, they must vest at 100% after two years.