Personal Finance

I want to double my 401(k) contribution up to 6% — is this a smart move?

Rich Duprey

Published: December 22, 2024 11:34 am

“If it’s too good to be true, then it probably is” is a common warning that if something benefits you too much, it’s probably good to avoid it. Yet the word “probably” is doing a lot of heavy lifting there because sometimes things are that good.

One of those times is the employee match program in company retirement plans. For every one dollar you contribute, your employer will add another dollar, effectively doubling your contribution. However, it is not unlimited, typically a percentage of your income and usually between 4% and 6% of the total. The most common employee match is 50% of your contribution up to 6% of your compensation.

One Redditor who works at Walmart (NYSE:WMT) recently asked on the r/Walmart subreddit if there was some hidden trap he needed to worry about with the retailer’s employer match program. He was thinking of doubling his contribution to the 401(k) retirement program, which is a 100% match up to 6%, and wanted to know if there were any downsides.

24/7 Wall St. Insights:

• An employer-match program for a retirement program should be looked on as “free money” to help you achieve your retirement goals faster.
• It is generally good practice to contribute at least enough to maximize your employer’s matching contribution.
• Yet there may be times when you don’t want to max out your 401(k) plan.
• Also: Is your 401(k) optimized for your retirement plans? ^(Sponsored)

Using all your employer’s tools

For the current year, employees can contribute as much as $23,000 into a 401(k) plan (if you’re 50 years or older, you can contribute $30,500). While an employer’s matching contribution does not count towards that total, the most that can be put into a plan between employee and employer contributions in any one year is $69,000 (or $76,500 for those 50 and up).

Walmart’s 401(k) program is actually pretty good and it also offers a Roth 401(k) option that allows you to pay taxes now on your contributions instead of later when you withdraw the money from the account. The benefit is that qualified withdrawals in retirement are tax-free and there are no income limits such as there are with a Roth IRA. Walmart matches contributions at the same rate as its regular 401(k) plan.

The retailer even allows employees to rollover their 401(k) plans from previous employers. That can offer some benefits due to simplified recordkeeping and lower plan fees.

Moreover, Walmart has an employer matching program for those buying Walmart stock. Eligible workers can buy stock through payroll deductions and the company will provide a 15% match on the first $1,800 each year. The retail giant says some 400,000 employees participate in the stock purchase plan.

Over the past decade, WMT stock has a total return of 315% with dividends reinvested compared to a 252% return by the S&P 500.

To max out or not

While I’m not a financial planner or a tax professional, so these are only my opinions, but a good rule of thumb is to put at least 15% of your income into a retirement account. It’s like an immediate 50% to 100% return on your investment. But that doesn’t always mean using your employer’s 401(k) plan to achieve it.

At a minimum, you should contribute as much of your income as you can to get the full employer match. Then consider investing the rest in Roth IRA. You can contribute up to $7,000 in a Roth IRA if you’re under 50 and $8,000 if you’re 50 or older, up to certain income limits. Alternatively, consider a Health Savings Account (HSA), which is triple tax advantaged in that contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are tax-free.

By doing this, you may have a broader range of investments to choose from and potentially lower fees than many 401(k) plans. 

If you have extra money available to put aside after contributing to the 401(k) up to the employer match and contributing to a Roth IRA or HSA, then contribute more to the 401(k) up to the maximum allowed.

Key takeaway

Always take advantage of your employer’s matching program up to the maximum allowed, and possibly even beyond that. The best approach depends on your financial situation, tax bracket, and retirement goals. That’s why it is best to consult with a financial advisor who can help tailor a strategy to your needs.