One super easy way to put an extra few percents toward your savings rate is earning a retirement savings match at your employer. Every additional percent of your income, or your employer’s match, that you put away puts you a few months or sometimes years closer to financial independence (FI).
If your employer offers a retirement savings plan at work, such as a 401(k), 403(b), 457, Thrift Saving Plan or other plan, you may be eligible for a retirement savings plan matching contribution to help you get to FI faster. Of course, not all workplaces have retirement saving plans and even those that do don’t always match.
That said, it’s super important that you’re aware of what options are available to you and how they work or you could be inadvertently missing out on essentially free money. Whether you have access to a plan now or may have access to a plan in the future, here are a few things you definitely need to be watching out for to make sure you get every penny of retirement matching funds that you can.
Retirement Savings Plan Matching Rules Can Be Tricky
In an ideal world, all retirement savings plans would be super straight forward. The matching formulas would be intuitive and companies would do the right thing and honor the match no matter how you contribute your money. Unfortunately, confusing rules could be costing you some of your retirement savings plan matching dollars.
Confusing Matching Formulas
If you’re just getting started contributing to your workplace retirement plan, you may not be able to max out your benefits. Even so, getting the employer match is a great way to get started when you have high-interest rate debt that still needs to be paid off.
Unfortunately, matching formulas aren’t always as easy as matching dollar for dollar on the first 5% of your salary. Some employers have confusing formulas like matching 50 cents on the dollar for the first 5% you contribute and 25 cents on the dollar for the next 10% you contribute.
In total, you’d receive a 5% matching contribution from your employer, but in order to get that 5%, you’d actually have to contribute 15% of your salary. No matter what your employer’s matching formula is, make sure you understand how much you have to contribute in order to get the full employer match.
Maxing Out Early in the Year Could Cost You
Some employers contribute the employer match dollars each paycheck, which is great. Be aware, if you max your retirement account out early in the year, instead of contributing equally throughout the year, you may not get the full employer match. Instead, you may only get the employer match each pay period where you had a retirement contribution and miss out on the employer match in those pay periods where you couldn’t contribute anymore because you had already maxed out for the year.
Thankfully, some companies realize this is crazy and make a true-up contribution at the end of the year to give you the full employer match, but not all companies do. Make sure you either spread your contributions out throughout the year to get the full employer match or make sure your company will give you a true-up contribution. You don’t want to miss out on free retirement matching dollars.
Vesting Schedules Mean You Don’t Always Earn Your Match Dollars
If you just started a job in the last few years and you’re thinking about leaving for greener pastures, you might be surprised to learn you may not get to take all of your retirement matching dollars with you. Some employers don’t actually give you your employer match dollars right away. While they’re invested just like regular employer match dollars, you only earn the match dollars on a year by year basis according to your employer’s vesting schedule.
For instance, some employers allow you to vest 20% per year for five years. At the end of your first year of employment, you’d get to keep 20% of the match dollars you’ve earned, 40% the second year and so on until you earn 100% of the match dollars after year five.
The vesting is retroactive on all match dollars earned, so once you hit year five you get 100% of the previous match contributions and all match contributions going forward. However, if you left after the end of year three, you’d only get to keep 60% of the match dollars contributed to your account to that point.
End of Year Match Contributions Could Result in No Match the Year You Leave Your Job
Not all employers match your retirement contributions each pay period. Instead, some choose to deposit match dollars into your retirement account once per year. For these employers, many require you to be an active employee as of a certain date, such as December 31st, to earn the match for the year. If you leave your job on November 30th, you wouldn’t get a penny of employer match dollars for the year even though you were an active employee contributing for 11 months.
Not All Employers Match Catch up Contributions
People age 50 and older can contribute extra money in most workplace retirement plans called catch up contributions. The catch is, not all employers will match those catch-up contributions. This is another scenario when maxing out the regular portion of your workplace retirement plan early in the year could hurt you. Make sure to check with your plan to see how catch up contribution matching would work. Figure out a way to get the match and max out your catch up contribution, too.
Recheck Your Contributions Annually
While contributing to a workplace retirement plan should be easy enough that anyone could understand it, many plans have complicated rules when it comes to the employer match. Make sure you understand all the ins and outs of your plan’s employer match to make sure you don’t miss out on it. Then, check in once per year to make sure the rules haven’t changed. At that time, make sure you’ll still get the full employer match and, if the retirement plan contribution limits have increased, increase you contributions to max out your retirement account again to continue being a retirement savings rock star.