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401k percent match - Does it go by how much my gross pay is, or what percent I contribute to my 401k?

passive101 331 22 September 6, 2016 at 07:14 AM in Finance
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I have 2 jobs and both offer 401ks. One is a 4% match at 50% and the other is a 10% match and 50%.

I am contributing 12% to both of them currently to make sure I get the match, but I started thinking about how they come up with the match percentage.

Do they match the percent of my total paycheck, or how much I contribute to the 401k? For example the one that matches 4% at 50%. Is that a set amount for only up to 4% of my total paycheck? If I contribute 4% of my paycheck they will match it at 50%. OR if contribute 50% of my paycheck do they match 4% of what I put in?

Basically the more I put in is the higher match percentage or does the match part not matter as long as I contribute what they offer to match?

I hope that is clear enough, but I'm wondering if I get more match if I contribute more. If that's the case I should do less in the one that is a 4% match and more in the one that is a 10% match?

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#2
Invest your $ in this order:
1. Investments/Debts with ROI > than expected 401K return
2. 401K up to company match
3. HSA/Roth IRA annual max
4. 529 plan or other tax advantaged savings
5. 401K up to annual max
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#3
Gross. I'm confused by your terms though - usually they will, for example, match X% of what you put in up to Y% limit. IOW if you put in 10%, and they match 50% up to 4%, you'll get 4% from them (since 50% of 10% is 5% which is > 4%). OTOH if you put in 4%, they will match 50% of that or 2%.
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#4
i have usually seen where they will match x% of your contribution up to y%, with their max contribution inferred. for example, 50% match up to 6% = their max contribution is 50% of 6%, or 3%. if you put 6% in, they will match 50% of it. if you put in 7%, they still max at 3% (50% of 6).

the percentages are calculated on gross salary, but the actual contributions are based on your actual contributions, so they will only match what you put in. if they'll contribute up to 5% based on a 50% match, if you put in 8%, they will only kick in 4%. to maximize their match, you have to do at least 10% in that case.
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#5
Quote from passive101 View Post :
I have 2 jobs and both offer 401ks. One is a 4% match at 50% and the other is a 10% match and 50%.

I am contributing 12% to both of them currently to make sure I get the match, but I started thinking about how they come up with the match percentage.

Do they match the percent of my total paycheck, or how much I contribute to the 401k? For example the one that matches 4% at 50%. Is that a set amount for only up to 4% of my total paycheck? If I contribute 4% of my paycheck they will match it at 50%. OR if contribute 50% of my paycheck do they match 4% of what I put in?

Basically the more I put in is the higher match percentage or does the match part not matter as long as I contribute what they offer to match?

I hope that is clear enough, but I'm wondering if I get more match if I contribute more. If that's the case I should do less in the one that is a 4% match and more in the one that is a 10% match?
Your best bet is to just ask your employers. Your 4% match could be that they match up to a 4% contribution of yours, but only provide half that amount (i.e., so they'd contribute 2% if you contributed 4% or more). This is the most common scenario for many employers. Or, it could be that they provide half of your contribution, up until they have provided 4% of your gross salary (so you'd have to contribute 8% in that case). Or maybe something else. Just ask em
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Marshall: Have the rest of you guys figured out by now that mmathis is the smartest guy on SlickDeals?
#6
The verbiage used is not very clear. You could look at your 401k accounts and figure it out on your own or if you have your 401k brochure it might explain it in detail. If it's still not clear just ask your employers.

If I had to make a guess they will match up to 4% and 10% based on 50% of your salary, which equals to 2% match for your 4%+ contribution and 5% match for your 10% or greater contribution. Lets say hypothetically you made $50k for each job and contribute 12%. You would get $1000 match and $2500 match for each calendar year. Total $3500 match annually on top of your combined $12000 contribution.
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#7
Quote :
I have 2 jobs and both offer 401ks. One is a 4% match at 50% and the other is a 10% match and 50%.
This usually means that if you elect to contribute 4% (or 10% for the other company) of each gross paycheck amount to your 401k your employers will match 50% of your contribution, so they would add an extra 2% or 5% of your gross paycheck to your 401k. If you contribute more than the 4% or 10% limit for the company match, you likely won't get any additional match from your employer. With many employers, if you undercontribute one month, overcontributing in a subsequent month will not result in catching back up to the match amount if you had hit the limit each month. On the flip side, if you contribute too much early in the year such that you max out the $18k limit before your last paycheck, you might miss out on some company matching money since you wouldn't be able to make any contribution for the employer to match in paychecks that you receive after your 401k is maxed for the year. Some employers offer a "true-up match" which is a one-time contribution after the end of the calendar year which serves to ensure that you get the full match no matter if you maxed early or started contributing late. The company would figure out how much your actual salary was that year (bonuses/benefits excluded) then multiply that by the 4% or whatever of your salary they match. If this amount is more than the amount that they actually contributed throughout the year then the company would make an extra contribution in the amount of the difference.

Quote from flatlight View Post :
Invest your $ in this order:
1. Investments/Debts with ROI > than expected 401K return
2. 401K up to company match
3. HSA/Roth IRA annual max
4. 529 plan or other tax advantaged savings
5. 401K up to annual max
I would switch #1 and #2 making the company's 401k match the top priority even over high interest debt (you must at least be making the minimum payments though). Company matches are typically immediate 50%-100% returns whereas CC interest rates are often no more than around 25% annualized. It's tough to beat a 401k match!

I would also prioritize maxing a 401k over contributing to a 529 plan. The tax advantages of a 401k are better than a 529 which only has a chance of being deductible from state taxes, not federal. Also, you can't take out loans to fund your retirement but it is very easy for most students to take out relatively low interest loans for higher education.

Here's a commonly cited graphic showing priorities at a high level: http://i.imgur.com/fb7Dtmh.png and here is a more detailed version: http://i.imgur.com/CcEVQAV.jpg
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Last edited by dhc014 September 8, 2016 at 09:54 AM
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#8
Quote from dhc014 View Post :
I would switch #1 and #2 making the company's 401k match the top priority even over high interest debt. Company matches are typically immediate 50%-100% returns whereas CC interest rates are often no more than around 25% annualized. It's tough to beat a 401k match!
cc debt will compound at 25%. the match is only going to compound at 8% maybe. not to mention the match isn't an immediate return since you can't pull it without penalty and we are assuming he is vested.

to answer op's question, company A will deposit up to 2% of his salary if he invests 4% and company B will deposit up to 5% of his salary if he puts in 10%.
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#9
Quote from dayv View Post :
cc debt will compound at 25%. the match is only going to compound at 8% maybe. not to mention the match isn't an immediate return since you can't pull it without penalty and we are assuming he is vested.
You seem to be ignoring the immediate match from the company itself while comparing the gains on this match to the interest charges. That doesn't make much sense. I was going to write up an explanation and some examples for why an employer 401k match should usually be prioritized over paying extra towards CC debt but that has already been done many times.


If your employer doesn't offer a sponsored retirement plan, like a 401(k), you can ignore this. Likewise, if your employer has a 401(k) option but no match, pay off credit card debt first. But if your employer is matching your contributions, you would be passing up free money if you chose not to participate.
First and foremost: If your employer offers to "match" any portion of your retirement contribution, take full advantage of that opportunity.
Here's some financial advice on which almost everyone agrees: Regardless of your debt, you should contribute a percentage of your income that will generate the maximum employer match on your 401(k) or similar plan.
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Last edited by dhc014 September 7, 2016 at 01:48 PM
#10
Quote from dayv View Post :
cc debt will compound at 25%. the match is only going to compound at 8% maybe. not to mention the match isn't an immediate return since you can't pull it without penalty and we are assuming he is vested.

to answer op's question, company A will deposit up to 2% of his salary if he invests 4% and company B will deposit up to 5% of his salary if he puts in 10%.
Irrelevant IMO. Company 401k match is free money.
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#11
Quote from jagojago View Post :
Irrelevant IMO. Company 401k match is free money.
Technically, yes. But can you withdraw it to pay your CC bill? Likely not right away, and certainly not for free. So now you've earned that great 50% return on your 401K dollar in year 1, followed by however your investments perform subsequently. Meanwhile your CC debt dollar is continuing to compound by 25% annually.

You may be able to squeeze out a few extra bucks by doing as you suggest -- getting the 401k match, then withdrawing and paying taxes and 10% penalty and using the funds to now pay your other debt. But I doubt many financial advisers would suggest it. For 95% of the population it's too complex and risky, and won't help them get a handle on their finances.

If we're talking about 5% student loans, or 11% credit card debt maybe it's a reasonable idea. But for high interest loans? Ehhh... I don't like it at all.

(not a financial advisor)
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Quote from dukeblue219 View Post :
Technically, yes. But can you withdraw it to pay your CC bill? Likely not right away, and certainly not for free. So now you've earned that great 50% return on your 401K dollar in year 1, followed by however your investments perform subsequently. Meanwhile your CC debt dollar is continuing to compound by 25% annually.

You may be able to squeeze out a few extra bucks by doing as you suggest -- getting the 401k match, then withdrawing and paying taxes and 10% penalty and using the funds to now pay your other debt. But I doubt many financial advisers would suggest it. For 95% of the population it's too complex and risky, and won't help them get a handle on their finances.

If we're talking about 5% student loans, or 11% credit card debt maybe it's a reasonable idea. But for high interest loans? Ehhh... I don't like it at all.

(not a financial advisor)
Why would you even want to withdraw from a retirement account to pay a CC bill? If your finances are so insecure that you're at risk of being unable to make minimum payments on your credit cards then you probably shouldn't be worried about investing yet. The benefit of a decent employer match easily outweighs the savings of paying extra towards even high interest credit card debt. The first link that I posted in my previous reply contains an example with numbers.
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Quote from dhc014 View Post :
Why would you even want to withdraw from a retirement account to pay a CC bill? If your finances are so insecure that you're at risk of being unable to make minimum payments on your credit cards then you probably shouldn't be worried about investing yet.
If you have the ability to contribute to your 401k to get the full employer match AND pay down your credit card debt within a couple years then of course you should do both. But the question here, I thought, was whether you should focus on the 401k at the expense of credit card debt. My point is that a dollar of credit card debt will very quickly grow larger than the dollar of 401k match. I don't see the logic in making minimum payments, allowing your credit interest to accumulate over years and years, just to obtain a one-time 50 or 100% employer match.

The scenario you posted has two possibilities -- $800 to debt and $200 to 401k, OR $1000 towards debt. This person is able to pay off his debt in 17 months if he avoids the 401k, or 22 months if he does both. That's not unreasonable at all. I guess my difference is I was imagining a person who was falling behind in CC debt, or treading water, just to make sure he or she was getting the 401k match. That could be a complete disaster. That's what prioritizing the 401k over debt means to me.
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Last edited by dukeblue219 September 8, 2016 at 07:48 AM
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Quote from dukeblue219 View Post :
If you have the ability to contribute to your 401k to get the full employer match AND pay down your credit card debt within a couple years then of course you should do both. But the question here, I thought, was whether you should focus on the 401k at the expense of credit card debt. My point is that a dollar of credit card debt will very quickly grow larger than the dollar of 401k match. I don't see the logic in making minimum payments, allowing your credit interest to accumulate over years and years, just to obtain a one-time 50 or 100% employer match.

The scenario you posted has two possibilities -- $800 to debt and $200 to 401k, OR $1000 towards debt. This person is able to pay off his debt in 17 months if he avoids the 401k, or 22 months if he does both. That's not unreasonable at all. I guess my difference is I was imagining a person who was falling behind in CC debt, or treading water, just to make sure he or she was getting the 401k match. That could be a complete disaster. That's what prioritizing the 401k over debt means to me.
Making minimum payments on debts is, of course, priority number one. If there is no employer match available or once the employee contributes enough to get the full employer match, then it might make sense to put extra money towards paying down the high-interest debt faster than minimum payments alone would. The high-interest CC debt balance should not grow because new charges should not be added to existing high-interest balances. These are personal finance fundamentals that I just assumed would be handled before the decision of whether to pay down debt (more than minimum payments) or contribute to a 401k in order to get an employer match was relevant.

The employer match isn't a one-time thing. Each paycheck is a little bigger because of the match and this increased income will typically be larger than the amount of interest charged for the credit card debt that could be avoided by paying down the debt instead of contributing to the 401k to get the match.
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#15
What I am trying to grapple with is time. I was listening to DR once and someone called in, asking what to do with $20k they had come into (inheritance? I don't recall the exact #) - pay off a car loan, or start investing for retirement. I think the guy was mid 20's. Of course in true DR fashion he recited the "baby steps" and immediately said to pay off the car loan. Idiotic move IMHO - long-term returns on stocks are 7% and the guy's car loan was like 2%, so naturally you put your $$ to the highest rate.

But what if the car loan was 10%? If he has it paid off in 4-5 years, sure he's going to pay interest, but that $25k would otherwise be sitting in stocks getting 7% (long term) for that 4-5 years BUT ALSO every year until he retires. What's lost in the simple analysis is that the car loan term is MUCH shorter than the horizon for retirement, generally - in this guy's case probably 4-5 years vs 35-40 years.
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