Quick overview

A 401(k) is one of the most common workplace retirement savings vehicles in the U.S. Employees elect a percentage or dollar amount to deduct from each paycheck and invest among plan options. Employers frequently offer matching contributions to encourage saving. However, employer contributions aren’t always immediately yours — vesting rules determine how much of an employer match you keep if you leave the job.

This article explains how contributions, employer matching, and vesting interact; shows practical examples; points out common pitfalls; and gives action steps you can use today. Authoritative sources: IRS guidance on 401(k) plans and contribution limits (https://www.irs.gov/retirement-plans) and Department of Labor retirement-plan resources (https://www.dol.gov/agencies/ebsa).

How contributions work

  • Elective deferrals: You choose to defer part of your salary into the plan. Contributions can be to a traditional 401(k) (pre-tax) or a Roth 401(k) (after-tax) if your plan offers it. Traditional contributions lower taxable income today; Roth contributions grow tax-free and aren’t taxed on qualified withdrawals.

  • Payroll mechanics: Contributions come directly from payroll. You can change your election during enrollment windows or according to your plan’s rules. Automatic enrollment plans enroll eligible workers at a default contribution rate unless they opt out.

  • Contribution limits and catch-ups: The IRS sets annual limits for elective deferrals and total contributions (employee + employer). These limits change from year to year; check the IRS page for current numbers before planning (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits).

  • Investment choices and fees: Your plan offers funds (index funds, target-date funds, active funds). Fees vary. High fees can erode returns over decades, so compare expense ratios and plan administration costs.

Employer matching: common formulas and examples

Employers use several matching structures. Common examples:

  • Dollar-for-dollar match, up to X% of pay. Example: 100% match up to 3% of salary.
  • Partial match, e.g., 50% of contributions up to X% of pay. Example: 50% match on the first 6% you contribute. If you contribute 6% of salary, employer adds 3%.
  • Tiered matches: 100% on first 3%, then 50% on next 2%, etc.
  • Profit-sharing or non-elective contributions: Employer contributes a fixed amount regardless of employee deferral.

Why the match matters: Employer match is essentially free money that increases your retirement principal and compounds over time. Even modest matches dramatically raise retirement outcomes compared with not contributing.

Real-world example:

  • Salary: $60,000
  • Employee defers 6% = $3,600/year
  • Employer matches 50% up to 6% = $1,800/year
  • Total annual addition = $5,400 (plus investment returns)

If you leave before vesting is complete, you may forfeit some or all employer contributions — see the vesting section.

For tactical ideas on capturing every dollar of matching money, see our guide: Strategies for Maximizing Employer 401(k) Matches (internal link: https://finhelp.io/glossary/strategies-for-maximizing-employer-401k-matches/).

Vesting schedules: cliff vs graded

Vesting is the schedule that determines when employer contributions become the employee’s property. Your own salary deferrals are always 100% vested — you own them immediately. Employer contributions follow the plan’s vesting rule.

Two common vesting types:

  • Cliff vesting: No employer contributions vest until a specified period (commonly 2–3 years), then you become 100% vested all at once.
  • Graded vesting: Employer contributions vest gradually over a multi-year schedule (for example, 20% after year one, 40% after year two, etc.).

Federal rules (ERISA) set maximum timing for vesting on certain plans and protect participants; check your plan’s Summary Plan Description (SPD) for exact rules. For more on how schedules affect your match, see How Vesting Schedules Affect Your Employer Retirement Match (internal link: https://finhelp.io/glossary/how-vesting-schedules-affect-your-employer-retirement-match/).

Example of vesting consequence:

  • Employer match contributed $6,000 over two years, but graded vesting leaves you 50% vested. If you leave, you keep $3,000 of employer contributions; the rest is forfeited back to the plan.

What happens when you change jobs

If you’re vested in employer contributions, you can roll those funds into your new employer’s plan or an IRA, or keep them in the old plan if allowed. Unvested contributions are typically forfeited. Before leaving, check the SPD and confirm the vesting percentage and rollover options.

See our focused guidance on moving 401(k)s: 401(k) Strategies When You Change Jobs: Rollovers, Loans, and Decisions (internal link: https://finhelp.io/glossary/401k-strategies-when-you-change-jobs-rollovers-loans-and-decisions/).

Tax and withdrawal rules (high-level)

  • Withdrawals from traditional 401(k)s are taxed as ordinary income. Roth 401(k) withdrawals can be tax-free if rules are met.
  • Early withdrawals (before age 59½) generally trigger income taxes plus a 10% early-distribution penalty unless an exception applies (IRS/DOL rules apply).
  • Required Minimum Distributions (RMDs): RMD rules have changed in recent years; consult the IRS for current RMD ages and rules.

Always confirm tax specifics with IRS guidance: https://www.irs.gov/retirement-plans.

Practical strategies to maximize benefits

  1. Capture the full employer match. At a minimum, contribute enough to get the maximum match — it’s a guaranteed return.
  2. Use automatic escalation if offered. Raising your contribution rate gradually (e.g., +1% per year) increases savings without feeling a pinch.
  3. Rebalance periodically. Keep your asset allocation aligned with your goals and risk tolerance. Target-date funds are a simple option for set-and-forget investors.
  4. Watch fees. Prefer low-cost index funds when available. Even 0.5% higher annual fees can meaningfully lower your nest egg over decades.
  5. Consider Roth vs Traditional choice based on expected tax rates in retirement. Split contributions if you’re unsure; tax diversification is useful.
  6. Use catch-up contributions if eligible (ages 50+), but verify the current IRS limits before contributing.
  7. If you plan to change jobs within a vesting window, assess whether delaying a move might net you more in vested match dollars.

Common mistakes to avoid

  • Not contributing enough to receive the full employer match.
  • Ignoring vesting schedules and losing part of your employer match when leaving.
  • Letting high fees linger in the plan without comparing alternatives.
  • Overconcentrating in company stock.
  • Assuming employer matches are permanent — plans and matches can change.

Action checklist (next steps)

  • Read your plan’s Summary Plan Description (SPD) and fee disclosures.
  • Confirm the plan’s match formula and vesting schedule.
  • Set contributions to at least the match-eligible level.
  • Compare investment options and costs; consider low-cost index or target-date funds.
  • Revisit your allocation annually and after major life events.

Frequently asked questions (brief)

  • Are my contributions taxed now? Traditional 401(k) contributions reduce taxable income now; Roth contributions don’t.
  • If I leave before fully vested, do I lose my match? Yes—unvested employer contributions are usually forfeited according to the vesting schedule.
  • Can I take a loan from my 401(k)? Some plans allow loans subject to plan rules; loans have risks and repayment obligations.

For details about plan-specific rules and protections, consult the Department of Labor’s Employee Benefits Security Administration (https://www.dol.gov/agencies/ebsa) and the IRS retirement plan pages (https://www.irs.gov/retirement-plans).

Sources & further reading

Internal resources

Professional disclaimer

This article is educational only and not personalized financial advice. Plan details vary; consult your plan administrator and a qualified financial or tax advisor for decisions tailored to your situation.

(Edited for accuracy in 2025; always verify current IRS contribution limits before making contribution decisions.)