My Employer Doesn't Match My 401(k). Is It Still Smart to Max It Out?

When an employer matches your contributions to a 401(k), it represents one of the best retirement savings opportunities around. Not only does the match effectively double the size of your contribution up to the employer’s matching limit, but employer contributions also don’t count against the cap on annual 401(k) contributions. But matching is optional and some employers don’t do it. Even if your employer doesn’t offer a match, there are still plenty of good reasons to max out your 401(k) each year. A financial advisor can help you evaluate your retirement saving options.

Employer Matching Basics

If an employer match sounds like free money, that’s because it is. When an employer offers a 401(k) match, they agree to contribute $1 to your account for every dollar you save yourself.

Of course, employers may not match every single dollar you put away. For instance, if you’re diverting 6% of your salary into the 401(k), the employer may elect to match only half that, up to 3% of your salary. That is a consideration that can limit the value of an employer match.

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However, the employer match does not count toward your annual 401(k) contribution limit. For 2023, this elective deferral limit is $22,500. For example, if you make $100,000 and your job offers a 3% match, your total contribution in 2023 (including your employer match) would be $25,500. But keep in mind that the IRS imposes a limit on how much you and your employer can contribute to your 401(k) in a given year. In 2023, 401(k) contributions can’t exceed $66,000.

One thing to keep in mind is that employer matching is strictly voluntary. Employers can match, but they don’t have to. Fortunately, nearly all of them do. According to Vanguard’s 2022 “How America Saves” report, in 2021 95% of the Plans it oversaw offered employer matches. So this is not something you are likely to run into.

Why You Should Max Out Your 401(k) Without an Employer Match

Today, the job of saving for retirement falls largely on the shoulders of the employee. Many employers facilitate saving by offering company-sponsored retirement plans, but they don’t guarantee pension benefits. So a major reason to maximize your 401(k) contribution even in the absence of an employer match is that you are likely to need this money when you stop working. If you don’t save anything, Social Security benefits may be all you have to fall back on.

In addition to this stark reality about your future retirement, here are some other reasons to maximize your 401(k) even if your employer doesn’t match:

Tax benefits. Saving in a 401(k) offers tax advantages now, as well as in the future. Every dollar you elect to defer now reduces your taxable income for the current year and lowers your tax liability. At the same time, income taxes on any earnings from investments made in your 401(k) also are deferred until you withdraw them.

Higher contribution limit. 401(k)s have a higher limit on contributions – $22,500 – than the other main retirement savings option, an individual retirement account (IRA). For 2023, the IRS caps contributions to IRAs at $6,500. That’s $16,000 less than the 401(k) cap. So a 401(k) lets you save a lot more.

Convenience. Deferring salary to a 401(k) is also much easier and more convenient than initiating a transfer into an IRA. Because 401(k) contributions come out of your paycheck automatically without you having to do a thing, saving in a 401(k) can be a lot easier than making manual contributions to another savings vehicle.

Legal protection. Money in your 401(k) is legally protected from creditors. If worse comes to worst and you have to file for bankruptcy protection, the people and organizations you owe money to cannot come after your 401(k). That’s not true of most other accounts.

Why You Shouldn’t Max Out Your 401(k) Without an Employer Match

It may not always be the best idea to contribute the maximum to a 401(k) when an employer does not match. For example, 401(k) fees vary widely. Fees charged by 401(k) plans, just like mutual fund expense ratios, can have a large effect on investment performance. If your employer’s 401(k) plan charges high fees in addition to not offering a match, you might be better off putting your retirement funds elsewhere.

Here are some other reasons why you potentially wouldn’t want to max out your 401(k):

Fewer investment options. Many 401(k) plans offer a limited number of investment options, and may have only a handful of target-date funds. If your investment needs don’t match the available options, a maximum contribution may not be the best approach.

You change jobs often. People who change jobs often might do better saving in an IRA rather than using a plan tied to a specific employer. It’s generally not the best approach to have a lot of retirement accounts because it can make keeping track of all tricky.

You have other financial goals. There may be other things in your life that are more important than retirement at this point. For instance, most advisors suggest building up an emergency fund equal to three months or so of living expenses in an account that is safe and readily accessible. A 401(k) is for long-term savings – you’ll usually pay a penalty if you withdraw 401(k) funds before age 59½ – so it’s not well-suited for emergency funds. Other goals that could take precedence include saving up for a down payment on a home or paying off student loans.

Bottom Line

Even when an employer doesn’t match 401(k) contributions, there are still good reasons to contribute the maximum allowed amount in a given year. Contributions to a 401(k) provide tax benefits now, as well as later on. You can also contribute much more to a 401(k) than to an IRA. Still, in some cases, it may be wiser to contribute less than the maximum if your employer doesn’t match, especially if the 401(k) plan has high fees and mediocre investment options.

Retirement Planning Tips

• A financial advisor can help you cut through the confusion of deciding how to save for retirement. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• SmartAsset’s retirement calculator is a quick, simple and free way to get an idea of how to prepare for a comfortable retirement. Using your location, income, age and anticipated retirement expenses, our tool will provide instant answers to questions about how big your retirement nest egg should be and how much you have to save to get there.

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