With 50% Employer match in 401k, is it always better to contribute?

[rael]

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]

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]

"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]

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]

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]

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.

[Cheddar Stacker]

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]

Not always. For example, if you don't expect the match to vest with the company it would not make sense.

[Cressida]

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]

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]

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]

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]

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]

Lame! I'm sorry I'm wrong, for your sake.