If you work for a company that has a 401(k) plan, congratulations. As of December 2023, around 70 million Americans took part in roughly 710,000 company retirement plans. According to Investment Company Institute, there were about $7.4 trillion in assets invested in those 401(k) plans as of the end of 2023.

Retirement plans, and especially 401(k)s, have stayed the course and remain popular despit🍒e economic downturns and periods of high inflation, both of which can make it difficult for people to save.

But you may have questions about your retirement plan. For instance, are you missing out on extra money that could be powering your savings through the years? Keep reading to lea♑rn more about how 401(k)s work and how companies match employee contributions.

How a 401(k) Works

The 401(k) is a special investment account designed to help working individuals save for retirement. The 401(k) plan dates back to 1978 when Congress passed the Revenue Act. Working individuals were given an opportunity to avoid paying taxes on deferred compensation, such as bonuses or stock options.

The plan didn't gain traction until 1981. That's when the Internal Revenue Service (IRS) came up with rules to allow taxpayers to set aside 澳洲幸运5官方开奖结果体彩网:payroll deductions for their 401(k) plans. By the close of 1982, almost half of all large employers in the U.S. offered employees a 401(k) plan.

But how does the plan work? As noted above, you can elect to have a percentage of money set aside from every paycheck and placed in a designated investment account. You can choose how much of this contribution goes to your chosen investments within that account (which are usually 澳洲幸运5官方开奖结果体彩网:mutual funds).

In addition—and importantly—some 澳洲幸运5官方开奖结果体彩网:employers match employee contribu🀅tions up to a certain percentage, which means your employer contributes money to your retirement account above and beyond what you contribute.

There are two types of 401(k)s:

• Traditional 401(k)s: These accounts use pre-tax dollars for contributions. This reduces your 澳洲幸运5官方开奖结果体彩网:taxable income and, therefore, your annual tax liability. You can claim the amounts you invest as a tax deduction on your annual tax return. You are, however, liable for taxes on any withdrawals you make.
• Roth 401(k)s: These accounts require contributions to be made using after-tax dollars, which means there is no immediate tax benefit. However, any withdrawals you make are tax free.
  

Eligibility

Eligibಌility for a 401(k) plan varies based on the employer. This also applies to matching contributions. In 2023:

• 74% of employers offered immediate participation in a 401(k)
• 59% of employers offered automatic enrollment
• Commonly, one year of employment was required before employer contributions began
• However, almost 50% of plans vested employees in employer matching contributions immediately
• 50% of plans provided matching employer contributions, while 36% provided both matching and non-matching contributions

Match Amounts

Matching programs vary by company, sector, and even economic conditions. Some companies offer really generous 401(k) matches while others don't match their employees' contributions at all.

But even those companies that match don't offer an unlimited matching amount. In other words, you can’t contribute half of your salary and watch your company add the same amount to your account.

The average match by employers was 4.6% of pay, according to Vanguard's annual report on investing behavior. The highest percentage was 6.99% of pay.

Under most circumstances, the employee has to contribute more to get the maximum company match. Depending on the quality of the 401(k) plan, that could work to the disadvantage of the employee, because they could be forced into less than high-quality investment vehicles with high 澳洲幸运5官方开奖结果体彩网:management fees.

Manage Your Plan

What good is a match if you don’t have the knowledge and experience to invest the money in the best funds made available by your plans? In 2023, about 43% of 401(k) plans offered managed account investment advice to their participants, and about 10% of employees who were offered the advice put it into action. 

Types of Investments

Most 401(k) plans offer investors a variety of investment options. Some of the most common include company stock, securit🐟ies (such as stocks, bonds, mutual funds, exchange-traded-funds, and other related assets), and annuities. But, typically, the most common investments available are mutual funds.

According to the 澳洲幸运5官方开奖💫结果体彩网:Financial Industry Regulatory Authority (FINRA), most plans offer from at least three investment options to, more usually, dozens. Those offering brokerage accounts give participants a wide range of investments to choose from.

Target-Date Funds

There are some surprising changes to the way people are saving. For instance, Vanguard noted that the percentage of plans that offer 澳洲幸运5官方开奖结果体彩网:target-date funds increased from 88% in 2014 to 96% in 2023.

These are mutual funds that are structured to grow asset values over a period of time. They address the needs of the investor by a particular date. As such, almost all participants had plans that offered target-date funds and 64% of contributions went to them.

Invest on Your Own

An option chosen by some participants is the self-directed plan, which allows you to manage your account on your own. It's similar to a traditional brokerage account, which, as mentioned above, some 401(k) plans offer. Not only does the selection of investment choices increase, your ability to make your own investment decisions does, too.

Alternatively, when investing the money in your 401(k), you could get the help of an independent 澳洲幸运5官方开奖结果体彩网:financial advisor.

Annual Limits on 401(k) Deferrals and Matching

All of this is good to know. But sometimes people overlook the fact that there are contribution limits related to a 401(k). These limits are set by the Internal Revenue Service (IRS) and are adjusted annually for 澳洲幸运5官方开奖结果体彩网:inflation.

For the 2024 tax year, you can contribute a maximum of $23,500 to your 401(k). If you're 50 or older, the IRS allows you to make an additional catch-up contribution of $7,500.

Your employer's contributions don't count toward this limit. However, there is a cap on the combined contributions (yours and your employer's) that can be made to your plan. In 2024, that limit is $69,000, or $76,500 for people 50 and older when you factor in a catch-up contribution.

The Bottom Line

Don't miss the opportunity to save for retirement if your employer offers a 401(k) plan. This is especially valuable if your employer matches your contributions.

Many employers match as much as 50 cents on the dollar, on up t♋o 6% of your salary. Most advisors recommend contributing enough to get the maximum match.

Turning down free money put towards your retirement nest egg doesn't make sense. So do all you can to set aside the necessary amount yearly to maximize employer matching.

If you need advice related to your retirement investing, consider speaking with an indepe🅠ndent financial advisor.

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