Personal Finance

My wife's new job offers a whopping 25% 401(k) match — should we max it out?

Maurie Backman

Published: December 26, 2024 9:45 am

Key Points from 24/7 Wall St.

• It’s common for companies to offer 401(k) matches.
• A 25% match is extremely generous.
• It pays to try to max out if you can, but keep your company’s 401(k) vesting schedule in mind.
• Also: Is your 401(k) optimized for your retirement plans? (Sponsored)

In recent years, 401(k) matches have become a common workplace benefit. And if they’re generous enough, they could really help you make good progress toward building your retirement nest egg.

A lot of companies will match 3% or 5% of your salary in your 401(k). So if you earn $50,000 a year with a 3% match, you’ll get a free $1,500 if you put in that much money out of your own paycheck.

But what if your employer offers a super generous 25% match? If you earn $50,000 a year and are able to contribute $12,500 to your 401(k), it means you’d have an additional $12,500 coming your way.

Such was the situation a lucky Redditor found himself in a couple of years ago. He posted that his wife’s employer matches 401(k) contributions at 25%, but because she wasn’t earning so much money, snagging that match in full was a stretch.

The reality is that if you’re able to capitalize on a 25% match in your 401(k) plan, I’d normally tell you to go for it. But there are some caveats to keep in mind.

Don’t pass up free money if you don’t have to

The last time I worked for a company that offered a 401(k), the employer match I was eligible for was 0%. So in my book, a 25% match reads like a fantastic deal. And if you’re eligible for such a match and are in a position to claim it, then you absolutely should.

But there are a couple of things to be cautious about. First, 401(k)s have a maximum yearly contribution limit. So before you get too excited about a 25% match, recognize that if you’re a higher earner, 25% of your pay may be more than what you’re allowed to put into a 401(k) in a single year.

But let’s say you have a $50,000 salary. In that case, you’re below the threshold for maxing out a 401(k). However, whether you can afford to part with 25% of $50,000 is a different story.

If you’re in a dual-income household and can swing a 25% contribution to your 401(k), go for it. You’ll not only snag a lot of free money, but potentially shield a large chunk of your pay from taxes.

But you don’t want to create a situation where you can’t cover your monthly expenses because you’re filtering too much money into your 401(k). That’s not going to do your finances much good, as it’ll put you at risk of landing in costly credit card debt.

Be mindful of your 401(k)’s vesting schedule

Another thing to remember is that the 401(k) match you get from your employer isn’t necessarily yours to keep right away. If your company imposes a vesting schedule, you may need to stay with your employer for a good number of years before you fully own your 401(k) match. And if that’s not something you plan to do, then chasing that match may not make sense or do you much good.

Since everyone’s situation is different, if you’re looking at a 25% match in your 401(k), I’d recommend sitting down with a financial advisor who can give you custom advice based on your specific circumstances. Remember, too, that if you decide to put a lot of money into your 401(k), you’re going to want to invest it savvily. And navigating your fund choices in a 401(k) can be tricky if you’re new to investing. So that’s another reason to turn to a financial professional for help.

If you’re going to make an effort to fund a 401(k), you want to make sure your money is working for you. That means choosing age-appropriate investments with a reasonable amount of risk, and also doing your part to avoid unnecessary investment fees that could eat away at your 401(k)’s returns over time.