401(k) 101: Contributions and Company Match
A 401(k) is one of the most powerful tools for building long-term wealth. Whether you’re just starting your career or have been working for several years, understanding how your contributions and your 401(k) company match work is key to making the most of this valuable benefit.
In this post, we’ll break down exactly what a 401(k) is, how it differs from other retirement accounts, how company matches and contributions work, and how it can help you reach your financial goals.
What is a 401(k) plan?
A 401(k) is an employer-sponsored retirement savings plan that allows you to set aside money from your paycheck before taxes are taken out (traditional) or after taxes (Roth). The money you contribute grows over time through investments like stocks, bonds, and mutual funds.
For professionals with equity compensation, your 401(k) works alongside your stock options, RSUs, or ESPP to form a broader wealth-building strategy. Balancing contributions between these and your 401(k) company match can help you maximize growth while managing risk.
401(k) vs. Roth IRA vs. Traditional IRA
401(k)
Contribution limits: $23,000 in 2025 ($30,500 if age 50+).
Taxes: Traditional 401(k) contributions are pre-tax and reduce taxable income today. Roth 401(k) contributions are after-tax, but withdrawals in retirement are tax-free.
Eligibility: Offered by your employer; may include a company match.
Withdrawals: Penalty-free after age 59½ (some exceptions apply).
Roth IRA
Contribution limits: $7,000 in 2025 ($8,000 if age 50+).
Taxes: Contributions are after-tax; withdrawals of contributions and earnings are tax-free in retirement.
Eligibility: Income limits apply (high earners may not qualify directly).
Withdrawals: Contributions can be withdrawn anytime without penalty; earnings can be withdrawn tax-free after age 59½ if the account is at least five years old.
Traditional IRA
Contribution limits: $7,000 in 2025 ($8,000 if age 50+).
Taxes: Contributions may be tax-deductible depending on income and whether you or your spouse is covered by a retirement plan at work; withdrawals are taxed as ordinary income.
Eligibility: Available to anyone with earned income.
Withdrawals: Penalty-free after age 59½.
Key takeaway: Your 401(k) usually allows for higher contributions and may include a match, which is essentially free money. IRAs can be great additional savings vehicles, especially for tax diversification in retirement.
Your Contributions
When you join your company’s 401(k) plan, you decide how much of your salary to contribute. This is called your contribution rate and is usually expressed as a percentage of your pay.
You can adjust your contributions anytime, but increasing them early in your career can have a big impact thanks to compounding.
Even small increases, like going from 5% to 6%, can make a meaningful difference over decades.
Important note: The $23,500 employee contribution limit for 2025 is just one piece of the puzzle. When you include your 401(k) company match and potential after-tax contributions (if your plan allows), the total contribution limit is actually $70,000 in 2025 ($77,500 if age 50+). This often surprises people and is helpful in understanding if you want to maximize your retirement savings. One of the best strategies to take advantage of the full $70k is through a Mega Backdoor Roth. This allows you to make after-tax contributions beyond the standard limit and then convert them into Roth dollars, where future growth and withdrawals can be tax-free.
The 401(k) Company Match
Many employers encourage you to save by offering a matching contribution, essentially free money for your retirement.
A common example is a dollar-for-dollar match up to 4% of your salary.
Another example is 50 cents on the dollar up to 6% of your salary.
If you do not contribute enough to get the full match, you are leaving money on the table.
Example:
If your salary is $80,000 and your company matches dollar-for-dollar up to 4%, contributing at least $3,200 a year ensures you get the full $3,200 match. That is an immediate 100% return on that portion of your savings.
Two Common Questions About Contributions and Company Match:
Should you still contribute if the company doesn't offer a match? In many cases, the answer is yes—because of the tax benefits and the long-term compounding power of starting early.
Should you contribute more than the match? The answer depends on your overall situation: if you’re financially stable, not working toward short-term goals like buying a home, and want to prioritize long-term growth, then going beyond the match makes sense. However, if you need more cash in the short term, this may not be a good idea, as you are restricted from using those funds.
Why the 401(k) Company Match Matters
The company match is part of your total compensation, just like your salary, bonuses, or equity awards. By not taking advantage of it, you are effectively turning down part of your paycheck. Over time, the match can add up to tens or even hundreds of thousands of dollars toward your retirement.
The annual employee contribution limit ($23,500 in 2025) is only part of the picture. Once you factor in your company match and possible after-tax contributions, you can save up to $70,000 in 2025 ($77,500 if age 50+).
4 Things You Can Do to Get Started or Optimize
Check your plan rules to see your match formula and vesting schedule.
Set your contribution rate high enough to get the full match.
Increase your contributions over time, especially when you get a raise, bonus, or equity vesting event.
Review annually to make sure you are on track for your retirement goals.
The Bottom Line
Your 401(k) is more than just a retirement account. It is a cornerstone of your financial future. Contributing enough to earn your full 401(k) company match is one of the smartest and simplest steps you can take toward long-term security. For those with equity compensation, aligning your 401(k) strategy with your stock-based wealth plan can help you grow, diversify, and protect your future. The earlier you start and the more consistent you are, the more your future self will thank you.
Ready to Take Control of Your Retirement?
At DiversiFi, we specialize in retirement planning for professionals with equity compensation. We help you maximize your 401(k) benefits while integrating your stock options, RSUs, and ESPP into a cohesive strategy designed to grow and protect your wealth. Ready to build a retirement plan that works for your unique financial picture? Contact us to get started.
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