Employer contributions, also called 401k matching, is when your employer puts money into your account for you. An employer may offer to match, while others do not.
Many people refer to a match as free money since it is in addition to your regular salary. For example, if your employer contributes $1,000 to your account, this is not part of your salary. It is cash your employer is giving you to save for retirement. The confusing part of this is the way employer matches work.
It is usually a percentage match up to a maximum dollar amount. You might see it as a 50% match up to 6% of pay. Your employer will match every dollar you contribute with $0.50 up to a maximum of 6%.
Here is an example. Let’s say you earn $40,000 and contribute $2,000 annually. Your employer will put an additional $1,000 into your account.
If you still make $40,000 but contribute $6,000 annually, your employer will only match $1,200. This is because 6% of your pay is $2,400, and 50% is $1,200.
I know this can be confusing. The important thing to remember is that if your employer offers a 401k match, you should take advantage of it.