Remember we talked about free money in the section on Understanding 401(k)s? Often your employer will agree to match your contributions to your 401(k) plan up to a certain percentage. This is free money. If you contribute, they will too. If you don't contribute, they will not. Even if you can't afford to contribute the maximum, you should contribute something.
It is pretty common for employers to add 50% to what you contribute up to 6% of your salary. That means for every $1 you put in, your employer will put in 50 cents. See the table below for an example:
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Your Contribution
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Your Employer's Contribution
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Total
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3% of $40,000 salary, or $1,250
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50% of your contribution, or $625
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$1,875
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6% of $40,000 salary, or $2,400
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50% of your contribution, or $1,200
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$3,600
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Vesting
Should you decide to leave your employer, all of the money you invested in your 401(k) belongs to you. However, the amount invested by your employer does not permanently belong to you unless you have reached a certain period of time of employment. This is known as a vesting period.
Often companies will use what is known as a graded vesting schedule. This means that you are eligible to receive 20 percent of the matching funds after the second year. Then each year you are eligible for an additional 20 percent up to a maximum of 6 years, which is when you become fully vested. Vesting schedules change from employer to employer. After two or three years, you may be fully vested with some employers.