The 401(k) Match is Back

After a temporary pause on matching your 401(k) contributions many companies are reinstating the opportunity to have employer contributions match your contributions up to certain percentage.  Employers may temporarily stop making 401(k) matching contributions during hard times. Many companies were concerned about saving cash and avoiding layoffs during the first part of the pandemic when the economy essentially shut down for many industries. Although such a cut is usually temporary, it can derail retirement goals for some employees. It can also create tough decisions for those individual’s nearing retirement, such as whether to increase their contributions, reduce goals, or delay retirement.

The suspension of an employer’s match often lowers the morale of workers and dissuades them from participating in the retirement plan. Some people reduce their own contributions or just stop contributing altogether, which can have a big impact on their retirement savings in the future.  However, that is a bad decision if you want to meet your long-term financial planning goals.  If you are one of those people, you should restart, or increase contributions to your 401(k) immediately and at least contribute enough to obtain the maximum employer 401(k) match assuming it has been reinstated.

What Actions Can Employees Take to Offset the Reduction, or Temporary Elimination of the 401(k) Match

If your employer cuts matching contributions, it’s essential to offset the difference, so as not to fall behind in saving for retirement. It’s possible to make up for the loss of matching contributions by your employer, or at least reduce the impact.

Here are two moves an employee can make to recover:

Increase Contributions

Don’t forget that increasing contributions lowers taxable income. Employees who can’t afford to immediately increase contributions should find out if their employer has automatic escalation. This allows workers to increase contributions in smaller increments, such as 1% to 2% each year. Employees should also increase contributions when they get a raise.

Contribute to Roth IRA

It’s possible to contribute to both a Roth IRA and an employer-sponsored retirement plan such as a 401(k). Income limits could affect eligibility for the ability to contribute to a Roth IRA.  However, there is an option available no matter what your income level is where you can contribute to a non-deductible traditional IRA, then immediately convert the amount to a Roth IRA avoiding the income limits of a direct contribution to a Roth IRA.

Contributions to a Roth IRA are not tax-deductible like those to a 401(k), but withdrawals are tax-free in retirement after 5 years of holding the funds in the Roth IRA. A Roth IRA can be particularly appealing for those who think they’re going to be in a higher income tax bracket during retirement. It could also be a wise choice for a younger worker with a smaller paycheck and lower tax rates than an older worker at a higher-paying job. For 2021, the annual contribution limit for a Roth IRA remains at $6,000, unchanged from 2020. The limit is $1,000 more for those 50 or older.

The most common formulas for 401(k) matching contributions are:

  • Basic Match: 100% match on the first 3% put contributed by the employee, plus 50% on the next 3-5% contributed.
  • Enhanced Match: 100% match on the first 4-6% put contributed by the employee.
  • Non-elective Contribution: 3% (or more) of employee compensation, regardless of employee deferrals.

Some employers choose a partial match plan, which means they put in a portion of the amount you put in, based on a set formula, up to a certain amount. The typical partial 401(k) match is 50 cents on the dollar, up to 6% of an employee’s salary. Employers can also choose a plan with a “dollar-for-dollar” match, with the most common being dollar-for-dollar, up to a maximum 5% of an employee’s salary.

Don’t Tap Into a 401(k)

Withdrawing funds from a 401(k) before retirement is generally never a good idea. For those younger than 59½, there will likely be a 10% early withdrawal penalty (there are a few exceptions), and the amount taken out is subject to income tax. Dipping into retirement funds early will also mean loss of tax-deferred growth on the returns from the investments that are withdrawn.

The Bottom Line

Employers may limit or stop matching contributions during hard times. The cut is usually only temporary. If an employer temporarily eliminates, or reduces matching contributions, offset the difference by contributing more to a 401(k) and contributing to a Roth IRA. It’s also generally a bad idea to tap 401(k) funds before retirement.


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