Ch. 13:  401(k) Plans

13.0 Introduction

            If you take a typical career path, you will likely have access to a 401(k) plan, which is a tax-sheltered retirement account offered by some, but not all, employers.  These plans typically allow employees to contribute on a traditional or Roth basis to avoid taxes today or in the future, respectively.  But that’s not all.  Most 401(k) plans offer a company match, meaning that the money you contribute to your 401(k) plan will be matched by your employer.  That’s free money so you should take advantage. 

  Who gets a 401(k) plan?  Not everyone.  If you work for the government, you will not have a 401(k) and will instead have the option to contribute to a 401(a), 403(b), and/or 457(b)—these will be covered in Chapter 14.  If you land a job at a non-profit, you might have a 401(k) or the organization may instead choose to offer employees a 403(b) plan.  The most likely candidate for a 401(k) is a full-time employee at a for-profit business.  For-profit organizations are not permitted to offer those other plans [401(a), 403(b), or 457(b)], so the 401(k) plan is the default option.

  Because 401(k) plans offer tax savings, which employees love, most for-profit employers wisely decide to make the plans available to full-time employees, who generally see 401(k) plans as important components of a compensation package.  But the usefulness of a 401(k) varies by firm.  Some provide a company match, some don’t.  Some offer low-cost index funds and target date funds, others don’t.  Some small firms don’t offer a 401(k) at all!  As you entertain job offers and plan for your future, it’s vital that you consider the tax-sheltered plans that a firm offers. 

13.1 Contributing to a 401(k)

            Unlike Individual Retirement Accounts (IRAs), 401(k) plans are directly connected to the employee’s compensation.  You cannot deposit money from a checking account into a 401(k).  Instead, contributions to a 401(k) plan are made via a paycheck deduction.  For example, an employee may earn $6,000/mo and decide to contribute $500/mo to their 401(k) plan.  This $500 will be withheld from the worker’s paycheck and directly contributed to the 401(k).  Changing your 401(k) contribution usually means filling-out a form online (“paycheck reduction agreement”) or requires a quick trip to your HR office.  Because financial situations change frequently, especially for young employees, you may find yourself changing your 401(k) contributions quite frequently—that’s okay!

  In all cases, employees have the option to contribute to a 401(k) on a pre-tax or traditional basis and most employers also allow their workers to use a Roth 401(k). Which should you choose?  It depends on factors discussed back in Chapter 11.  If you want to reduce your current-year taxes, a traditional 401(k) is superior.  If you prefer to pay taxes now, but avoid future taxes, a Roth 401(k) will do the trick.  As previously discussed, I recommend you always select the Roth version when your marginal income places you in the 10% or 12% bracket.  If your tax rate is higher, the choice is more difficult.

  Aside from tax treatment, traditional and Roth 401(k) plans have the same regulations.  For most, the maximum annual contribution to a 401(k) plan in 2025 is $23,500.[1]  This is a combined maximum, meaning that a person contributing $16,000 to a traditional 401(k) can only invest a maximum of $7,500 in a Roth 401(k).  Older employees, 50+, are allowed to contribute up to $31,000, with the extra $7,500 frequently referred to as catch-up contributions.  These are large sums of money and it’s rare for young employees to reach their annual limit, but it sure would be nice to start your career with some large 401(k) (or IRA) contributions.  I’ve noticed that recent college grads frequently have a small window to really hammer their 401(k) plans.  Graduates will often live at home for a year or two after graduation.  While it may suck to live with your parents as an adult, eliminating housing costs means the investor has substantial financial leeway.  Without naming names, I can point-out several former students that maxed-out their 401(k) in their first two years of employment.  The future benefits of this decision are massive. 

  The table below compares the future value of a 401(k) for three prospective employees.  The first employee maxes-out their 401(k) for two years and then never makes an additional contribution.  The second employee constantly contributes $4,000/year to their 401(k), while the third makes substantial contributions in the final years prior to retirement.  In all three cases, the workers retire at age 60.  Let’s see what their account balances look like at age 65.

Case 1:  The investor maxes-out their 401(k) for just two years and then ceases all contributions.  In total, the investor contributes $47,000 to their account, yet builds an account value to $2,456,899 by age 65.

Case 2:  The investor consistently contributes $4,000 to their 401(k) each year.  Over the course of their working year, they contribute $152,000 and build their account value to $2,345,182 at age 65.

Case 3:  This person fails to make 401(k) contribution until age 50 and now, in a panic, contributes $30,500, the 50-and-over max, each year from age 50 to 60.  Despite making $341,000 in contributions, the investor only builds their account to $925,184 by age 65.

            Case 1 is able to reach the highest value with the least effort.  Investing in your early years feels like cutting down a tree with a chainsaw; investing in your later years is like using a hatchet.  Furthermore, because Case 1 starts so early, they can afford to take-on more risk in their investment portfolio.  It’s far more likely that this individual can reach a 10% annualized return than Case 3, who is near retirement when they make contributions and will thusly need a relatively bond-heavy portfolio.  In all three cases, keep in mind that we are not accounting for inflation.  Two-million dollars will not have the same value today as it does in latter decades.  This doesn’t change the story: Investing early is the easiest way to reach financial independence.  It may be infeasible to max-out your 401(k) at an early age, but don’t let perfect be the enemy good.  Any extra contributions you can make in your 20s will go a long way.  Furthermore, this lesson doesn’t just apply to 401(k) plans.  Early-life contributions to a Roth IRA are just as good, if not better!  Personally, my investing life looks like a combination of Case 1 and 2.  I invested as much as I could in my late 20s and early 30s[2] and still make annual contributions today, but I’ve taken my foot off the gas a bit at age 38.  In 2024, I took my family to Hawaii, which cost about $5,000.[3]  That’s a nice chunk of change, but this spending decision hurts my future more when I’m young and less as I age since the older I get, the fewer years I have left for my money to grow.  Saving is less powerful the older you get; thus, spending gets less costly as you age.  This is so, so important to understand.

13.2 Withdrawing from a 401(k)

            In chapter 12, we learned that Roth IRAs offer a special perk.  Roth (but not traditional) IRA investors are able to withdraw their contributions (but not interest) at any age without taxes or penalties.  Otherwise, investors must wait until age 59.5 to make withdrawals.  On the contrary, there are no important discrepancies pertaining to traditional versus Roth 401(k) plans.  Generally, one cannot withdraw from these accounts until age 59.5 unless they are willing to pay a penalty and extra taxes.  Here are four possible withdrawals, based on age and tax treatment:

• Withdraw $1,000 from a Roth 401(k) at 59.5 or older:  Pay no taxes or fees.

• Withdraw $1,000 from a Traditional 401(k) at 59.5 or older:  Pay income taxes on all of the money withdrawn (not just the investment gains).  A person that has $60,000 in ordinary income and withdraws $1,000 from a traditional 401(k) will be taxed as having earned $61,000 in income.

• Withdraw $1,000 from a Roth 401(k) at an age below 59.5:  Pay a 10% penalty and income taxes only on earnings in the account.  Contributions are not taxed or penalized.

• Withdraw $1,000 from a Traditional 401(k) at an age below 59.5:  Pay a 10% penalty and income taxes on all the money withdrawn. 

We can bicker on the specifics, but there really is only one takeaway:  You should not withdraw from a 401(k) until you reach age 59.5 UNLESS you can do so via a hardship withdraw or through some other creative means.  Here are some scenarios that might qualify you for a hardship withdrawal, which were taken directly from the IRS website[4]:

• Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.

• Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).

• Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents or beneficiary.

• Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.

• Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.

• Certain expenses to repair damage to the employee’s principal residence.

I hope that you don’t have to withdraw from a 401(k) early, but I guess it’s nice to know that you can in dire situations.  Generally, you should have other plans in place.  For example, a person experiencing a medical emergency can hopefully use HSA fund to cover expenses.  Individuals needing money for a funeral can withdraw contributions from a Roth IRA, brokerage account, or… whatever.  If a person needs to withdraw from a 401(k) it’s usually a sign that they have made financial mistakes, but there are exceptions to this rule of course.  If a single person suddenly is diagnosed with a terminal illness, I can absolutely understand why they would want to use funds in their 401(k), even if they are very young.

            As outlined above, it’s typically best to wait until 59.5 to make withdrawals from a 401(k).  What if you leave your job?  What happens to your 401(k) then?  In this scenario (which we discussed in Chapter 12), you have two viable options:  (1) Leave the account alone or (2) Rollover to an IRA.  If you leave the account as-is, your 401(k) will be invested and you still full control of the account just as you would as an employee.  You just can’t make additional contributions.  If you 401(k) offers low-cost investing options, there is no pressing reason to do anything with your account.  However, since one can choose their IRA vendor, it’s typical for savvy investors to find superior investing options within an IRA than those offered for their 401(k), even if their 401(k) investing options are decent.  So, it might be best to conduct a rollover where you convert your 401(k) to an IRA.  In doing so, the account maintains its tax status (e.g. a Roth 401(k) becomes a Roth IRA). 

            As with traditional IRAs, traditional 401(k) plans have required minimum distributions (RMDs).  When you reach about age 73 (this age will likely change over time), you will be forced withdraw from your account, which creates a taxable event.  For most, this is not a problem since the majority of folks will need to access their funds during retirement anyway.  But for others (usually rich people) it’s a pain.  Wealthy individuals often have enough liquid assets that 401(k) withdrawals are unnecessary.  They would rather allow the account to grow tax-free to, perhaps, donate the money tax-free upon death.  RMDs thwart such efforts.

            There are plenty of complex considerations and rules are likely to change.  During the first year or so of Covid, the government allowed anyone to withdraw from their 401(k) (and other accounts) without any penalties provided they could show evidence they were financially burdened by the pandemic (which is everyone, right?).  Expect rules to evolve, but don’t anticipate much to change about your plan.  Use a 401(k) to avoid taxes and make withdrawals during retirement.  It’s pretty simple really.

13.3 401(k) Match

            According to this article[5], 98% of 401(k) plans include some type of employee match.  But specifics on these matches greatly differ from business to business and some are quite complicated.  Starbucks offers a simple, yet lucrative 401(k) plan.  Employees at Starbucks earn a 100% match on the first 5% of their salary.  Suppose Ben is a full-time barista for Starbucks, earning $50,000/year.  He needs to contribute $2,500 (5% of $50k) to his 401(k) to unlock his full match.  If he contributes less than $2,500, every dollar he contributes will be matched, but he will fail to fully take advantage of the matching plan.  If he contributes more than $2,500, the first $2,500 will be matched and additional contributions beyond this threshold will offer tax savings as with any 401(k) contribution..  Here are a few examples of other really solid 401(k) plans [6]:

These are all really nice plans.  I’d be happy to have any of ‘em.  From my experience discussing job offers with students, the Samsung match variant is quite common.  To get the full match, participants must contribute at least 6% of their salary.  If they do so, they will receive a 4.5% match.  For example, a $100,000-earner needs to contribute $6,000 to their 401(k).  If they contribute at least this much, they will earn a $4,500 company match.  I rarely speak in absolutes in this book, but I will here.  Always, always, contribute enough to get the full company match.  Don’t turn down free money.

  Let’s work through some examples to better understand how this match is applied.  Be careful.  Solving for company matches is a common problem area for students.  Assume the following individuals work for Samsung (or another company with this plan).  Determine how much money the company will contribute to each person’s 401(k).

Person 1:  Salary = $88,000; 401(k) Employee Contrition:  $2,000

•  % of Salary Contributed = $2,000/$88,000 = 2.27%

  • • Since they are contributing less than 3%, all of their contributions will be matched at 100%.  They contribute $2,000, their employer matches every dollar.

• Match = $2,000

Person 2:  Salary = $115,000; 401(k) Employee Contrition:  $5,000

• % of Salary Contributed = $5,000/$115,000 = 4.35%

  • • They are contributing less than 6%, so they are not getting the full match.  The first 3% of their income is matched 100%, the remaining contribution is matched at 50%.

      • • First 3%: $3,450 --> $3,450 match

        • Remaining money: $1,550 --> $775 match

• Match = $4,225

Person 3:  Salary = $61,000; 401(k) Employee Contrition:  $8,000

• % of Income Contributed = $8,000/$61,000 = 13.1%

o   They are getting the full match.  The employer will get the full match of 4.5% of salary.

• Match = $61,000(4.5%) = $2,745

In the above scenarios, I begin by determining what salary-percent the employee contributes to their 401(k).  This lets me know where I stand as I develop my answer.  If the person contributes more than 6% (person 3), then I know they will receive the full company match.  If less, I need to solve for the specific match they receive.  This isn’t easy.  A plethora or practice problems are provided at the bottom on the page.  Work through them.

13.4 Quirks with 401(k) matching

           At present, employer matches to a 401(k) are always traditional in nature.  For example, imagine you have a 100% match on the first 3% of your income (this is, by the way, the most common match in the industry).  If you earn $50,000 and contribute $1,500 to your Roth 401(k), the match of $1,500 is applied on a traditional basis.  This was a surprise for many of my prior students who found that they somehow had both a traditional and Roth 401(k) account despite never directly contributing traditionally.  How should this impact your elections?  If anything at all, it means that you should be more incentivized to contribute to a Roth account.  If the match is traditional by default, an investor looking to diversify between Roth and traditional accounts might decide to make all contributions on a Roth basis.

            On December 29, 2022, the federal government enacted an important piece of legislation termed the Secure Act 2.0.  This document paves way for many changes in the personal finance world.  One of the simpler changes regards Roth 401(k) plans.  Soon, firms will be allowed to offer 401(k) matches on a Roth basis.  So, if your employer allows it, you may contribute to a Roth 401(k) and have your funds matched in the same Roth 401(k) account.  But despite the act passing in late-2022, there has yet to be a rollout of the Roth 401(k).  If you are a college student a couple of years away from graduation, this is something to keep in mind. 

13.5 Vesting

            Consider a new hire that is paid a salary of $100,000/year by a firm that offers a 100% match on the first 6% of salary.  This employee could contribute $6,000 to their 401(k) during their first month of employment and then immediately quit.  In doing so, they would earn the full company match!  To thwart such nefarious scheming and to reward seasoned employees (and to cut costs), many firms choose to delay availability 401(k) matches.  Some firms will allow employees to earn the full match after one year of employment, others will gradually roll-out matches to employees so that the full match is not available until an employee has a few years of tenure with the firm.  The term “vesting” is used to indicate the rules that a firm has for providing 401(k) matches to its employees.  Here are a few styles of vesting that you may see when you enter the workforce, along with some real-world examples of each:

• Immediate Vesting:  The firm provides the full company match to all employees, regardless of employment duration.

  • • Boeing, Charles Schwab, Dollar General, and Microsoft

• Cliff Vesting:  The employee receives no match at first.  At some point in the future, the company match becomes fully available all at once.

  • • Tesla:  Fully vested after one year.

    • Caterpillar, CitiGroup, and Honeywell:  Fully vested after three years.

• Graded Vesting:  The employee is gradually and systematically provided greater matching over time.

  • • DonAssCo:  0% Vested After 1 Year, 25% Vested After 2 Years, 50% Vested after 3 Years, 100% Vested After 4 years[7]

When companies mix a complicated matching scheme with graded vesting, the calculations can get a bit arduous.  The worst vesting schedule one can have is shown below:

  Now suppose you work for a firm that offers the above vesting schedule for a 401(k) plan that provides a 80% match on the first 5% of your salary and a 25% match on the next 4% of salary.  A coworker of yours is in their fourth year of employment, has a salary of $100,000, and contributes $7,500 to their 401(k).  How much will they earn as a match?  To answer this question, let’s first determine whether they are getting the full match.  To get the full match, they would need to contribute 9% of their salary.  They are only contributing 7.5%, so they will not get the full match, but they will get the full 80% portion.  The first $5,000 of their contribution will get an 80% match and the remaining $2,500 in 401(k) contribution will get a 25% match.  Let’s solve for their match if they were fully vested.

• Match if 100% vested = ($5,000)(0.8) + (2,500)(0.25) = $4,625

Since your coworker is in their fourth year of service, they are only 60% vested (they must complete four full years to be 80% vested).  So, we need to multiply this answer—$4,625—by 60%.

• Match, 60% vested = $4,625(0.6) = $2,775

Or… to solve this in just one equation, we could setup the following similar formula. 

• Match, 60% vested = ($5,000)(0.8)(0.6) + (2,500)(0.25)(0.6) = $2,775

There are lots of ways to construct the equation to solve for the company match.  Practice, practice, practice, to determine which works best for you.  The problems at the bottom of the page should be a big help.

            Ideally, you would like to work for a firm with immediate vesting, but few firms offer immediate vesting, unfortunately.  I hope that you will consider vesting when negotiating job offers and comparing competing offers.  A firm that offers a three-year 401(k) cliff vesting plan may be inferior to a firm with immediate vesting even if the former pays a couple-thousand more in salary. 

While slow vesting schedules can be a drag, 401(k) plans can still be of use even if you are 0% vested in your company match.  Remember that your contributions are always yours; in other words, your contributions are always fully vested.  When you contribute to a traditional or Roth 401(k) plan, you unlock valuable tax savings, regardless of whether your firm provides a match. 

13.6 Conclusions

            For those that work at for-profit institutions, 401(k) plans may serve as their key retirement vehicle, perhaps reaching seven-figures of value by retirement age.  As such, it is vital that you understand your plan—the vesting schedule, matching, investment options, etc.  It’s also crucial that you stay abreast to changes in federal policies.  Early in 2023, the aforementioned Secure Act 2.0 provided legislation that will soon allow for 401(k) match incentives on student loan payments.  It’s not clearly precisely how this will work, but it appears that a person with student loan debt may be able to make a, say, $1,000 student loan payment, provide documentation of this payment, and trigger their employer to provide a 401(k) match contribution on their behalf.  In the financial world, changes are normal.  Don’t worry, I got your back.  Subscribe (*feature added soon*) to my newsletter and I will send an email when important changes occur.

End Notes

[1] The limit rises just about ever year, lock-step with inflation.

[2] But I didn’t know jack about tax shelters, so all of my investing occurred in a brokerage account.  Argh!

[3] If that sounds cheap, it is.  I’ve taken advantage of credit card perks to make this trip quite cheap.

[4] Retirement Topics - Hardship Distributions | Internal Revenue Service (irs.gov)

[5] 401(k) Matching: What Is It and How Does It Work? (cnbc.com)

[6] Source:  26 Companies With the Best 401k Match Plans | Built In

[7] This company is fictional.  You ever try to look-up 401(k) plans of random companies one-by-one?  It’s tedious. 

Key Terms

401(k) Plan:  Read the chapter, you bum

Catch-Up Contributions:  Many retirement vehicles, including 401(k) plans, allow older individuals to make extra contributions beyond what younger folks can contribute.  The idea is that those that have inadequate retirement funds can “catch up” to where they need to be.

Cliff Vesting:  System of 401(k) matching where the employer match suddenly becomes 100% after a certain period of time.  For example, many firms offer no matching in the first three years of employment, but provide the full match after three years are completed.

Company Match:  System where employers will reward employee retirement contributions (e.g. through a 401(k)) by providing employer contributions into the employee’s account

Full Match:  The maximum employer max that can be achieved.  For example, consider an employee earning $100,000 in a 401(k) plan that offers a 75% match on the first 8% of salary.  To get the full match, the employer needs to contribute at least $8,000 to their 401(k) this year.  One should never miss out on a company match.  Note that the match is on an annual basis.

Graded Vesting:  System of 401(k) matching where the employer match is gradually made available to the employee

Hardship Withdraw:  For many plans, including a 401(k), investors have the potential option to withdraw funds prior to the normal age (59.5 for 401(k) plans) if they qualify for a hardship withdrawal, which can be triggered by a serious illness and other major life events.

Immediate Vesting:  System of 401(k) matching where the employer match is 100% available to the employee on their first day at the job

Secure Act 2.0:  Legislation passed in early 2023 that drastically changed many financial regulations, especially those related to 401(k), 529, and IRA plans

Vesting:  Term used to identify the timing by which 401(k) matches are made available to employees

Solutions

1. I charge into my H.R. (human recourses) department with a $100 bill and state, I would like to make $100 in traditional 401(k) contributions.  Will my request be granted?  Explain.

No.  401(k) contributions are pulled from your income.  You (usually) can’t just make a contribution, you must instead have an income reduction.  Usually, you will need to fill-out an “income reduction agreement” form or some other official document.

2. Does a contribution to a traditional 401(k) reduce one’s Social Security taxes?  How about a Roth 401(k)?

No. Contributions to a 401(k) have no bearing on social security or Medicare taxes.  For example, suppose you earn $50,000 in income and state that you would like to make a one-time $1,000 traditional 401(k) contribution from your income.  When HR handles this request, they will be using income that has already gone through the process of paying Medicare and SS.  So, the full $1,000 will be contributed to the traditional 401(k), but your income has already been subjected to SS and Medicare before this process even beings.

Roth contributions also no impact on Social Security or Medicare taxes (and this year’s income taxes, for that matter).

3. I make a one-time $10,000 contribution to my traditional 401(k) account.  In 35 years, when I withdraw the funds, my account has grown to $30,000.  What taxes will I pay on this withdrawal? 

I will pay income taxes on the full $30,000 I have withdrawn. The specific amount of taxes I pay will be based on my income.  For example, if I have $60,000 in income and then withdraw $30,000 from a traditional 401(k), I will now be taxed as having $90,000 in income.

4. I make a one-time $10,000 contribution to my Roth 401(k) account.  In 35 years, when I withdraw the funds, my account has grown to $30,000.  What taxes will I pay on this withdrawal? 

No taxes at all.

5. In 2025, you are single earn a total salary of $77,000 from your job.  You contribute $8,000 to a traditional 401(k).  Your company offers a 100% match on the first 5% of your salary.  Solve for your…

a.       2025 Income Taxes

Note that the match is irrelevant for tax purposes.

Taxable Income = $77,000 - $8,000 = $69,000

Income Taxes = $10,094

b.      2025 Social Security Taxes

401(k) contributions do not affect SS taxes

SS Income = $77,000

SS Taxes = $77,000(0.062) = $4,774

6. In 2025, you are single and earn a total salary of $77,000 from your job.  You contribute $4,000 to a traditional 401(k) and $4,000 to a Roth 401(k).  Your company offers a 100% match on the first 5% of your salary.  Solve for your…

a.       2025 Income Taxes

Taxable Income = $77,000 - $4,000 = $73,000

Income Taxes = $10,974

b.      2025 Medicare Taxes

Medicare Income = $77,000

Medicare Taxes = $77,000(0.0145) = $1,116.50

7. In 2025, you are single and earn $55,000 in salary.  You contribute $6,000 to a traditional 401(k).  In a brokerage account, you earn $3,000 in dividends for a stock index fund that you bought 10 years ago.  In your brokerage account, you also sell stock for $18,000 that you bought for $15,000 8 months ago.

a.       2025 Income Taxes

Income = $55,000 - $6,000 + $3,000 = $52,000

Income Taxes = $6,354

b.      2025 Social Security Taxes

SS Income = $55,000

SS Taxes = $55,000(0.062) = $3,410

c.       2025 Capital Gains Taxes

Capital Gains = $3,000

*In the 15% bracket*

Capital Gains Taxes = $3,000(0.15) = $450

8. Katie just graduated from college and began a job earning $80,000 per year, but she will not start until October.  She has no income prior to starting this job.  She definitely wants to contribute to a 401(k) because it includes a company match. Should she contribute to a traditional or Roth 401(k)?  Explain

Roth 401(k).  Since she isn’t beginning her job until October, she will only have 3 months to earn salary.  Her 2025 income will be low… low enough to be in the 10% or 12% bracket.  ALWAYS CONTRIBUTE TO A ROTH ACCOUNT WHEN YOU ARE IN THE 10% OR 12% BRACKET.

9. Ansley just graduated from college and began a job earning $40,000 per year.  She knows she wants to make Roth contributions and currently plans to invest $5,000.  Her company does not offer a match.  Should she contribute to a Roth 401(k) or Roth IRA?  Explain.

Roth IRA.  If there is no company match, she is better off using the Roth IRA since she can freely withdraw contributions from a Roth IRA at any age.  Furthermore, Roth IRAs provide more investment flexibility since you can choose your vendor and invest in a wider array of assets (such as individual stocks, but you’re probably still better off using index funds).

10. Bella just graduated from college and began a job earning $50,000 per year.  She knows she wants to make Roth contributions and currently plans to invest $10,000.  Her company does not offer a match.  Should she contribute to a Roth 401(k) or Roth IRA?  Explain.

Both!  She should max-out her Roth IRA first.  In 2025, that total is $7,000 (but it’s possible she could contribute even more since she can still contribute to her 2023 Roth IRA prior to April 15th).  She can contribute the rest—$3,000—to her Roth 401(k).

11. Hannah earns $78,000 in salary.  Her firm offers a 401(k) with a 75% match on the first 4% of salary. 

a.       How much does Hannah need to contribute to her 401(k) to get the full match?

$78,000(0.04) = $3,120 

Note that this is a great way to begin solving for matching questions even if this is not explicitly asked.  This answer is very useful in solving for parts B-E. 

b.      If she contributes $1,000, how much will she receive as a match?

She won’t get the full match, so every dollar she contributes is matched.

Match = $1,000(0.75) = $750

c.       If she contributes $2,000, how much will she receive as a match?

She won’t get the full match, so every dollar she contributes is matched.

Match = $2,000(0.75) = $1,500

d.      If she contributes $5,000, how much will she receive as a match?

She will receive the full match.

Match = $3,120(0.75) = $2,340

e.       If she contributes $10,000, how much will she receive as a match?

She will receive the full match.

Match = $3,120(0.75) = $2,340

12. Ivy earns $88,600 in salary.  Her firm offers a 401(k) with a 100% match on the first 5% of salary and a 25% match on the next 10% of salary.

a.       How much does Ivy need to contribute to her 401(k) to get the full match?

She needs to contribute 15% of her salary to get the full match.

To get full match: $88,600(0.15) = $13,290

LET’S EXPLORE FUTHER TO HELP US ANSWER B THROUGH E.

To get the 100% match:  $88,600(0.05) = $4,430

·       Contributions between $0 and $4,430 get the 100% match

·       Contributions between $4,430 and $13,290 get the 25% match

b.      If she contributes $1,000, how much will she receive as a match?

Match = $1,000(100%) = $1,000

c.       If she contributes $2,000, how much will she receive as a match?

Match = $2,000(100%) = $2,000

d.      If she contributes $5,000, how much will she receive as a match?

Match = $4,430(100%) + $570(0.25) = $4,572.50

e.       If she contributes $10,000, how much will she receive as a match?

Match = $4,430(100%) + $5,570(0.25) = $5,822.50

f.         If she contributes $20,000, how much will she receive as a match.

Full Match.  She gets a match on the first $13,290 she contributes.

Match = $4,430(100%) + $8,860(0.25) = $6,645

13. Mariah earns $210,000 in salary.  Her firm offers a 401(k) with a 50% match on the first 8% of salary.  Her firms offers a cliff vesting 401(k) with the cliff occurring at year 3. This is Mariah’s first year at the firm.

a.       If she contributes $1,000, how much will she receive as a match?

She’s not getting a match!  With cliff vesting, you receive no match until the cliff (in this case, three years) is reached.

b.      If she contributes $2,000, how much will she receive as a match?

$0

c.       If she contributes $5,000, how much will she receive as a match?

$0

d.      If she contributes $10,000, how much will she receive as a match?

$0

14. Ansley earns $150,000 in salary.  Her firm offers a 401(k) with a 50% match on the first 8% of salary.  She is in the fourth year of employment for her firm, which offers a graded vesting schedule.  In year four, she gets 80% of her match.

a.       How much does Ansley need to contribute to her 401(k) to get the full match?

The 80% part of this question does not impact how much she needs to contribute.  She must contribute 8% of her salary.

To get full match = $150,000*0.08 = $12,000

b.      If she contributes $1,000, how much will she receive as a match?

She gets a 50% match on this $1,000 contribution.  But, due to her vesting situation, she only gets 80% of this amount.

Match = $1,000(0.5)(0.8) = $400

c.       If she contributes $2,000, how much will she receive as a match?

Match = $2,000(0.5)(0.8) = $800

d.      If she contributes $5,000, how much will she receive as a match?

Match = $5,000(0.5)(0.8) = $2,000

e.       If she contributes $10,000, how much will she receive as a match?

Match = $10,000(0.5)(0.8) = $4,000

f.         If she contributes $20,000, how much will she receive as a match?

Full match is reached.

Match = $12,000(0.5)(0.8) = $4,800

15. True/False:  Most firms offer immediate vesting on 401(k) plans.

False.  As shown in the employer poll (provided in the chapter), only 28% of employers surveyed offered immediate vesting.  It’s safe to say that immediate vesting is not the norm.

16. Brady works for a firm that offers a lucrative employer 401(k) contribution.  The firm contributes $5,000 to each employee’s 401(k), regardless of the employee’s contribution!  How much can Brady contribute to his 401(k)?

$23,500.  The employer match does not count against his contribution limit. 

(This is typically true.  If someone’s income is very high, there is a combined employer/employee contribution limit that could be reached.  But they would need to have a ridiculously high salary and a good company match system.)

17. Based on your reading, what changes are likely to occur to 401(k) matches in the near future?

There are two potential changes related to the Secure Act 2.0.  You can do the ole’ control-f (search) to find them in the chapter.