Your employer offers a 401(k) match of '100% of contributions up to 3% of salary.' You earn $60,000/year and contribute 3%. What is your effective first-year return on that matched portion before any market growth?
A3% — the match equals your contribution
B50% — the employer adds half of what you contributed
C100% — the employer doubles your contribution
D6% — you contributed 3% and received 3% match, totaling 6% of salary
A 100% match up to 3% means your employer adds $1 for every $1 you contribute, up to 3% of salary. You put in $1,800 and your employer adds $1,800 — that is an immediate 100% return on your $1,800 contribution before the market does anything. Option D (6%) describes the total balance as a percentage of salary, not the return on your contribution. This instant guaranteed return is why capturing the full employer match is the first priority in any financial plan.
Question 2 Multiple Choice
You are early in your career with a relatively low income and expect to be in a higher tax bracket in retirement. Which 401(k) option is generally preferable?
ATraditional 401(k), because the pre-tax contribution reduces your current taxable income
BRoth 401(k), because contributions are after-tax and qualified withdrawals are tax-free
CEither is identical — the tax advantage is the same regardless of income trajectory
DTraditional 401(k), because Roth contributions are subject to a 10% early withdrawal penalty
The Roth 401(k) is advantageous when your current tax rate is lower than your expected future tax rate. Early-career workers with low income pay a low tax rate now — so paying taxes on Roth contributions today is cheap compared to paying taxes on traditional withdrawals later at a higher rate. The traditional 401(k) wins when current income (and thus current tax rate) is high and you expect to be in a lower bracket in retirement. Option C is wrong: the timing of taxes creates real economic differences depending on rate trajectory.
Question 3 True / False
Your own elective contributions to a 401(k) are always 100% vested — they belong to you immediately and cannot be forfeited if you leave the company.
TTrue
FFalse
Answer: True
Vesting schedules apply only to *employer contributions*, not to your own elective deferrals. Money you contribute from your paycheck is yours immediately and fully, regardless of how long you stay. Employer match contributions, however, may vest gradually over two to six years — leaving before fully vested means forfeiting the unvested portion of the employer's contributions.
Question 4 True / False
Roth 401(k) contributions reduce your current taxable income in the same way that traditional 401(k) contributions do.
TTrue
FFalse
Answer: False
Roth 401(k) contributions are made with *after-tax* dollars — no current tax deduction. You pay income tax on the money before it enters the Roth account. The benefit comes later: qualified Roth withdrawals in retirement (including all earnings and growth) are entirely tax-free. Traditional 401(k) contributions are pre-tax and do reduce current taxable income, but you pay ordinary income tax on withdrawals in retirement.
Question 5 Short Answer
Why do financial planners consistently recommend contributing up to the full employer match before allocating money to other financial goals like paying down debt or funding an IRA?
Think about your answer, then reveal below.
Model answer: The employer match is an immediate, guaranteed return — often 50–100% — that no other financial option can match. If you contribute less than the match threshold, you forfeit compensation your employer is offering you. Even high-interest debt rarely has an interest rate high enough to make forgoing a 50–100% guaranteed return rational. The match is effectively part of your salary that requires a specific action to collect.
The key is the instant guaranteed return, not market growth. Forgoing a 50% match to pay down 7% interest debt means you are sacrificing a 50% certain return to avoid a 7% cost — a poor tradeoff. The match changes the math so decisively that it nearly always wins priority, except in cases of extreme financial hardship.