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One key advantage of a 401(k) plan is that employers often provide a matching contribution. Employer matches represent a guaranteed return on your retirement investment, and it almost always makes sense to maximize them.
If your employer doesn’t offer any match, you may be wondering if you should still participate. The short answer, in most cases, is that it does still make sense to contribute to a 401(k) because it can offer significant tax advantages. In this article, we’ll look at why participating in a 401(k) plan can make financial sense when there’s no employer match—and when it may not.
Key Takeaways
- Many 401(k) plans offer employer matching contributions, but some don’t.
- Even without an employer match, you might want to participate in a 401(k) because of its tax advantages.
- Traditional 401(k) plans provide an up-front tax deduction plus tax deferral on your account’s earnings until you take the money out.
- Roth 401(k)s offer no immediate tax deduction, but your withdrawals can be tax-free if you meet the requirements.
- However, if your employer’s 401(k) plan has high fees or limited investment choices, you may want to invest your money elsewhere, such as in an individual retirement account (IRA).
When 401(k) Plans Without a Match Are Worthwhile
The employer matching contribution that is part of many 401(k) plans is an attractive benefit. In some cases, it is equivalent to your employer guaranteeing a 100% return on your investment. However, it’s not the only advantage that 401(k) plans have to offer.
With a traditional 401(k), your contributions to the plan are tax-deductible and the account’s earnings over the years will be tax-deferred. You won’t owe taxes on any of that money until you withdraw it, usually in retirement. If you contribute to a Roth 401(k), you won’t receive any up-front tax deduction, but all of your withdrawals will be tax-free if you meet certain rules.
These tax benefits are the same for every standard 401(k) plan, whether your employer makes a matching contribution or not. If you are going to be in a lower income tax bracket in retirement than you are now, as is often the case, then putting your money in a 401(k) could save you a significant amount of money in taxes.
Of course, there are other ways of saving for retirement besides a 401(k). A traditional individual retirement account (IRA) works much like a traditional 401(k) when it comes to taxation, and it might offer you a broader range of options for investing your money. And a Roth IRA works much like a Roth 401(k). However, IRAs have much lower annual contribution limits. Consider your options regarding the following contribution limits:
| 2024 and 2025 Common Retirement Account Contribution Limits | ||
|---|---|---|
| Retirement Account | 2025 Contribution Limit | 2024 Contribution Limit |
| IRA | $7,000 | $7,000 |
| IRA Catch-Up Contribution | $1,000 | $1,000 |
| 401(k) | $23,500 | $23,000 |
| 401(k) Catch-Up Contribution | $7,500 | $7,500 |
When 401(k) Plans Without a Match Don’t Make Sense
While it generally makes sense to save for retirement through your 401(k) even if your employer won’t match your contributions, there are a couple of exceptions.
The first exception is if the 401(k) that your company offers is not ideal for you. Some 401(k) plans come with high fees. Others have extremely limited investment options. Others may also be incompetently run. However, even these less ideal plans might be worth participating in if they have a really good employer match. Still, if you value flexibility, lower fees, and more funds to choose from, 401(k) plans may not make sense in this situation.
The second exception is if you are not earning enough income. Saving for retirement takes money away from building an emergency fund, paying bills, and living life today. Saving for retirement is a luxury that many people simply can’t afford.
Last, you may choose to not contribute to a 401(k) if you don’t plan on staying with the company long-term. In this situation, especially if you don’t plan on contributing more than the IRA limit, you may be better off putting retirement funds into an IRA instead. You would receive similar tax benefits while avoiding the hassle of transferring the funds out of an old 401(k) when you leave the company.
Important
Even if your employer matches your 401(k) contributions, that money doesn’t belong to you until it has vested according to the rules of your plan. Many vesting schedules last several years.
Other Matching Considerations
Many 401(k) plans offer tiered matching structures. For example, an employer might match your contributions dollar-for-dollar (100%) up to a certain percentage of your salary. Then, your employer would reduce the match rate beyond that. In this case, it often makes sense to contribute just enough to receive the full high-rate match, then reassess whether additional contributions should go into the 401(k) or elsewhere.
For instance, if your employer offers a 100% match on the first 4% of your salary and 50% on the next 2%, you’re getting the most value from that first 4%—every dollar you contribute is doubled.
At a 50% match rate, you’re still receiving free money, but not at the same rate. Depending on your overall financial goals, portfolio fees, plans for staying at the company, and other topics touched on in the last section, you might skip the smaller match. It might make more sense to divert additional savings into a Roth IRA or a taxable brokerage account after you’ve maximized the high-rate match.
What Is a Good Employer Match?
In a 2024 survey by Vanguard, the average value of employer-matching contributions was 4.6% of pay. The median—meaning half of plans were higher, and half were lower—was 4.0%. Most employers offered 3% to 6.99%. Seven percent of plans offered a 2% match, and 8% of plans offered a match that was 7% of pay or higher.
Can an Employer Stop Its 401(k) Match?
How Does Vesting Work in a 401(k) Plan?
The money that you contribute to a 401(k) plan is immediately vested—meaning that it belongs to you from day one. However, depending on the terms of your plan, any contributions that your employer makes might not vest until a particular date (cliff vesting) or might vest little by little over time until you’re fully vested (graduated vesting).
When you check your 401(k) account, you will likely see your employer’s contributions even if they’re not fully vested. Should you leave the company before your vesting period has finished, you will forfeit all or a portion of the match.
For example, a company with a 5-year graduated vesting schedule releases 20% of its contributions to its employees each year. Should an employee leave after three years, they will only receive 60% of their employer’s contributions to their account.
The Bottom Line
Many, but not all, 401(k) plans offer employer matching contributions. Even if your employer doesn’t provide a match, you may want to participate in the plan because of its tax advantages. An exception might be if your 401(k) plan has unusually high fees or poor investment choices, or if you believe it to be badly run.
