### Author Topic: With 50% Employer match in 401k, is it always better to contribute?  (Read 5133 times)

#### rael

• Posts: 5
##### With 50% Employer match in 401k, is it always better to contribute?
« on: December 07, 2014, 05:51:37 PM »
Hypothetically, let's say an employer has a 401k matching plan where they match 50% of your contribution, up to the IRS limit. So if someone contributes the maximum amount of \$18,000 in 2015, the company would match \$9000. My question is, given these circumstances, is it always mathematically better to contribute the full amount to the 401k, despite your given financial situation?

I understand that everyone's situation is different, and some people need cash on hand right away and cannot leave it in a retirement account. However here's what I am thinking. The IRA early withdrawal penalty is 10%. The company is matching 50% of your contribution amount. Based on this math, you will come out ahead by 35%, even if you need the money right away.
If we let x = contribution amount... then the math is

(x + .5x match) - 10% early withdrawal penalty * (x + .5x) = 1.35x
http://www.wolframalpha.com/input/?i=%28x+%2B+.5x%29+-+.1%28x+%2B+.5x%29+%3D+

Is there anything I am missing here, or is my math and assumptions correct?

#### Zamboni

• Magnum Stache
• Posts: 2691
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #1 on: December 07, 2014, 05:56:50 PM »
It's hard to imagine a better instant return on investment than that, and it's hard to imagine that anyone has loans with such high interest (although probably some unscrupulous payday loans top it!)

#### MDM

• Senior Mustachian
• Posts: 10316
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #2 on: December 07, 2014, 05:58:29 PM »
"Always" is a strong word, but I'd be comfortable with "yes, for any set of 401k investment options I've ever seen, including some high fee ones."

#### rael

• Posts: 5
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #3 on: December 07, 2014, 06:04:14 PM »
I agree always may be too strong of a term, as things are rarely "always" better in financial planning. I guess I just wanted to find out if I was missing any random tax laws or something that would make this not hold true, if someone had a very urgent and immediate need for cash and wouldn't have invested in their 401k otherwise.

#### kendallf

• Handlebar Stache
• Posts: 1064
• Age: 54
• Location: Jacksonville, FL
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #4 on: December 07, 2014, 07:20:44 PM »
Always take the free money.  :-)

If you are considering your own particular needs and are worried about needing some cash with short notice, check to see if the 401(k) offers loans.  You can avoid the 10% early withdrawal penalty this way in most cases.  It's usually not a great idea to borrow from it, but it beats the penalty.

#### Water

• Posts: 15
• I almost wrote something meaningful...
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #5 on: December 07, 2014, 08:28:02 PM »
for my situation it will always be mathematically better to max to get the %50 match. i will also say if someone is knowledgeable about 0% credit card intros, balance surfing, churning and innovative ways to get cash back it will be mathematically better for them to max as well.
« Last Edit: December 07, 2014, 08:32:07 PM by Water »

#### Cheddar Stacker

• Magnum Stache
• Posts: 3719
• Age: 42
• Location: USA
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #6 on: December 08, 2014, 12:03:33 PM »
I would say always. Madfientist says "usually always" in Addendum I on this relevant JLcollins post.

http://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/

#### Joel

• Pencil Stache
• Posts: 817
• Location: California
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #7 on: December 09, 2014, 01:09:24 AM »
Not always. For example, if you don't expect the match to vest with the company it would not make sense.

#### Cressida

• Handlebar Stache
• Posts: 2381
• Location: Sunset Zone 5
• gender is a hierarchy
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #8 on: December 09, 2014, 01:36:14 AM »
Well, yes. But is there any employer out there that matches up to the maximum contribution? For example, my employer matches 50% ... up to 4% of my gross. So, although I max out my own contribution, my employer will only ever contribute 2% of my salary (which, spoiler alert, comes to less than \$9K). I'd be curious to know if anyone's employer contributes anything that would approach \$9K.

#### wtjbatman

• Handlebar Stache
• Posts: 1310
• Age: 36
• Location: Missouri
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #9 on: December 09, 2014, 07:08:34 AM »
Well, yes. But is there any employer out there that matches up to the maximum contribution? For example, my employer matches 50% ... up to 4% of my gross. So, although I max out my own contribution, my employer will only ever contribute 2% of my salary (which, spoiler alert, comes to less than \$9K). I'd be curious to know if anyone's employer contributes anything that would approach \$9K.

Good news! I think you're wrong. At least, it's very possible you are wrong. Generally when an employer says they (as for your example) match 50% of your contributions up to 4% of your gross they don't mean 50% of 4%. Otherwise, why would they say it in such a convoluted way? They would just say "We match up to 2% of your gross." What your employer likely means is they match 50% of every dollar you contribute (You put in \$1, they put in 50 cents), up to 4% of your gross. So to max out your employer contribution, you would contribute 8% of your salary and they would match with 4%.

It is possible I'm wrong of course, but for your sake, I hope I'm right :)

#### FIPurpose

• Handlebar Stache
• Posts: 1389
• Location: WA
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #10 on: December 09, 2014, 07:41:03 AM »
Well, yes. But is there any employer out there that matches up to the maximum contribution? For example, my employer matches 50% ... up to 4% of my gross. So, although I max out my own contribution, my employer will only ever contribute 2% of my salary (which, spoiler alert, comes to less than \$9K). I'd be curious to know if anyone's employer contributes anything that would approach \$9K.

I can confirm that my wife's job has this exact deal. 50% match on everything contributed.

#### Cressida

• Handlebar Stache
• Posts: 2381
• Location: Sunset Zone 5
• gender is a hierarchy
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #11 on: December 09, 2014, 10:51:54 AM »
I can confirm that my wife's job has this exact deal. 50% match on everything contributed.

Nice! They must be pretty mad when anyone maxes their contribution.

Generally when an employer says they (as for your example) match 50% of your contributions up to 4% of your gross they don't mean 50% of 4%. Otherwise, why would they say it in such a convoluted way? They would just say "We match up to 2% of your gross." What your employer likely means is they match 50% of every dollar you contribute (You put in \$1, they put in 50 cents), up to 4% of your gross. So to max out your employer contribution, you would contribute 8% of your salary and they would match with 4%.

It is possible I'm wrong of course, but for your sake, I hope I'm right :)

Sadly, it is in fact 2%. And yes, it is convoluted. I guess they don't want anyone to get confused and think that they'd match 2% even if the employee was contributing less than 4%, but it is a weird way to put it.

#### Cheddar Stacker

• Magnum Stache
• Posts: 3719
• Age: 42
• Location: USA
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #12 on: December 09, 2014, 02:15:53 PM »
Sadly, it is in fact 2%. And yes, it is convoluted. I guess they don't want anyone to get confused and think that they'd match 2% even if the employee was contributing less than 4%, but it is a weird way to put it.

Even with that limitation you can still get to \$9k in ER contributions, you just have to earn:

\$9,000 / 2% = \$450,000

Piece of cake.

To answer your question though, I will be getting an employer contribution of nearly \$9K this year. I had planned for over \$12K, but unfortunately I will be slightly limited due to my age. It's a discretionary safe harbor contribution. I've discussed it on the forum a few times before.

I've also heard other forum members mention crazy high matches, so I know there are others with a similar perk. And no, I don't make \$450K, I just have a higher ER contribution % than most.

#### wtjbatman

• Handlebar Stache
• Posts: 1310
• Age: 36
• Location: Missouri
##### Re: With 50% Employer match in 401k, is it always better to contribute?
« Reply #13 on: December 09, 2014, 02:22:20 PM »
Lame! I'm sorry I'm wrong, for your sake.