How a 401(k) grows, and what the match is really worth
Why the employer match is the highest guaranteed return available, how the contribution limits work, and what traditional against Roth actually decides.
Last reviewed · 1,460 words
In short
- The employer match is free money and an immediate 50% to 100% return. Contributing less than the match threshold leaves it behind permanently.
- On an $80,000 salary contributing 6% from age 30 to 65 at 7%, the balance reaches about $1.51 million — of which $1.08 million is growth.
- Contributing 3% instead of 6% with a 3% match forfeits about $72,554 of employer money over a career.
- The 2025 employee limit is $23,500, with a $7,500 catch-up from age 50. The employer match sits outside that limit.
- Starting at 25 rather than 40 more than triples the outcome on the same contribution rate.
A 401(k) is an employer-sponsored retirement account in the United States. Contributions come out of pay before tax, the balance grows without annual taxation, and withdrawals in retirement are taxed as income.
Three things drive the outcome: how much you put in, how long it compounds, and whether you capture the employer match.
The match is the whole game at the start
Most employers contribute alongside you, commonly 50% of your contributions up to 6% of salary, or 100% up to 3% — both amounting to 3% of salary.
That is an immediate 50% to 100% return on the money, before it is invested in anything. Nothing else in personal finance offers it.
Each year, in order:
your contribution = min(salary × contribution %, the statutory deferral limit for your age)
employer match = min(contribution %, match limit %) × salary × match rate
balance = (balance + your contribution + employer match) × (1 + growth rate)
salary = salary × (1 + annual raise)
The deferral limit applies to your own money only — the match sits outside it, which is why the match is never the thing to cap.
On an $80,000 salary with a 3%-of-salary match reached at a 6% contribution:
| Your contribution | You contribute | Employer adds | Left behind |
|---|---|---|---|
| 3% | $2,400 | $1,200 | $1,200 a year |
| 6% | $4,800 | $2,400 | Nothing |
| 10% | $8,000 | $2,400 | Nothing |
Contributing 3% rather than 6% forfeits half the match. Over a 35-year career with 3% raises, that is $72,554 of employer money never received — and, once the growth on it is counted, roughly $250,000 of final balance.
Contribute at least to the match threshold before doing anything else with spare money — before extra debt repayment, before a taxable brokerage account, before an IRA. It is the only guaranteed return of that size available.
Vesting
The match is yours only once it vests, and schedules vary.
Immediate vesting — yours from day one, and increasingly common.
Cliff vesting — nothing until a set date, usually three years, then all of it.
Graded vesting — typically 20% a year over five years.
Your own contributions always vest immediately. Leaving before a cliff date forfeits the entire employer portion, which is worth checking before accepting a new job — a three-year cliff at 32 months is real money on the table.
What it grows to
$80,000 salary, contributing 6% with a 3% match, 3% annual raises, 7% return, from age 30 to 65:
| Component | Amount |
|---|---|
| Your contributions | $290,218 |
| Employer match | $145,109 |
| Investment growth | $1,079,033 |
| Final balance | $1,514,360 |
Growth is 71% of the final balance. You contributed under a fifth of it.
The two inputs that move that figure most are the start date and the return:
| Change | Final balance |
|---|---|
| Start at 25 instead of 30 | $2,255,812 |
| Base case, start at 30 | $1,514,360 |
| Start at 40 instead of 30 | $642,062 |
| Contribute 10% instead of 6% | $2,187,408 |
| Earn 5% instead of 7% | $1,021,414 |
Starting fifteen years later cuts the outcome by 58%, on the same contribution rate. Two percentage points of return costs a third of the balance. Both are larger effects than raising the contribution rate by half.
The limits
For 2025:
| Limit | Amount |
|---|---|
| Employee deferral | $23,500 |
| Catch-up, age 50+ | $7,500 |
| Enhanced catch-up, ages 60–63 | $11,250 |
| Total including employer | $70,000 |
The employee limit applies across all 401(k) plans you hold in a year, so changing jobs does not reset it. The employer match sits outside the employee limit and inside the total.
Two practical points. If you contribute a fixed percentage and hit $23,500 in October, contributions stop for the rest of the year — and so does the match at employers that do not offer a true-up. Front-loading contributions can therefore cost match, which is the opposite of what most people expect.
And highly compensated employees can have contributions capped or refunded if the plan fails its non-discrimination testing, unless the plan uses a safe harbour design.
Traditional against Roth
Traditional. Contributions reduce taxable income now; withdrawals are taxed as ordinary income later.
Roth 401(k). Contributions come from taxed income; qualified withdrawals are entirely tax-free.
The arithmetic is symmetric if your tax rate is the same at both ends. The decision therefore turns on which rate is higher.
Traditional suits high earners now expecting a lower bracket in retirement, and anyone in the 32% bracket or above.
Roth suits early-career workers in the 12% or 22% bracket, anyone expecting substantial retirement income, and those who value certainty against future tax rate rises.
Roth has a second advantage worth noting: a $23,500 Roth contribution is worth more than a $23,500 traditional one, because the Roth dollars are already taxed. At the limit, Roth effectively shelters more.
An employer match is always made pre-tax and lands in a traditional bucket, whichever you choose for your own contributions.
Withdrawals and the 10% penalty
Withdrawals before 59½ generally attract income tax plus a 10% penalty. Exceptions include disability, certain medical expenses, substantially equal periodic payments, and — under the rule of 55 — separation from service at 55 or later from that employer's plan.
Required minimum distributions begin at 73, rising to 75 for those born in 1960 or later. Roth 401(k)s no longer have RMDs from 2024.
Loans are permitted by most plans, up to the lesser of $50,000 or half the vested balance, repaid over five years. The interest is paid to yourself, which sounds free and is not: the money is out of the market while it is out, and leaving the employer usually triggers immediate repayment or treatment as a taxable distribution.
What to do when you leave
Four options, and the default is usually the worst.
Leave it in the old plan, if the balance is above $7,000 and the fees are reasonable.
Roll it into the new employer's plan, which keeps everything in one place and preserves the rule of 55.
Roll it into an IRA, which gives far wider investment choice and usually lower fees, at the cost of the rule of 55 and some creditor protection.
Cash it out, which triggers income tax, the 10% penalty, and the loss of every year of compounding it had left. It is the most common choice among people leaving a job with a small balance and it is almost always a mistake.
A direct trustee-to-trustee rollover avoids the 20% mandatory withholding that applies to a cheque made out to you.
Where the 401(k) sits among the other accounts
A 401(k) is one of several tax-advantaged options, and the usual priority order is settled enough to be worth stating.
First, contribute to the match. Guaranteed 50% to 100%, beaten by nothing.
Second, clear high-interest debt. Credit card debt at 20%-plus beats any expected market return.
Third, fund an HSA if you are eligible. It is the only account in the US system that is triple tax-advantaged — deductible going in, growing untaxed, and tax-free coming out for medical expenses. After 65 it behaves like a traditional IRA for anything else.
Fourth, an IRA, traditional or Roth, at $7,000 for 2025 with a $1,000 catch-up from 50. IRAs typically offer far wider investment choice and lower fees than an employer plan. Roth IRA eligibility phases out at higher incomes, which is what the backdoor Roth route exists to address.
Fifth, max the 401(k) to $23,500.
Sixth, a taxable brokerage account, which has no contribution limit and no tax shelter but full liquidity.
The order shifts with circumstances — a very high earner may prefer the 401(k) ahead of an IRA for the deduction — but the first two steps are close to universal.
Fees, quietly
Plan administration fees and fund expense ratios come out of the return before you see it, and the difference between a good plan and a poor one is large over a career.
An expense ratio of 1% instead of 0.1% on the balance modelled above costs roughly a quarter of the final amount over 35 years. The percentage is small and compounding makes it decisive.
Most plans now offer at least one broad low-cost index fund, and the annual fee disclosure lists every charge. Reading it once is worth more than most investment decisions available inside the plan.
What this calculator assumes
- Contributions are a percentage of salary, made through the year, with the statutory limit applied and the catch-up added from age 50.
- The employer match is expressed as a percentage of salary reached at a stated contribution level, and it is prorated below that level.
- Salary rises at the rate you set; the return is constant, which no market provides.
- The balance is pre-tax. A traditional 401(k) is taxed on withdrawal, so the spendable amount is lower.
- Plan fees and fund expense ratios are not deducted and typically cost 0.3% to 1% a year.