401(k) Overview

Investing in a 401(k) plan is the most simple and effective way to grow your nest egg. Most companies offer 401(k) plans to their employees. If your employer matches contributions, set a goal to contribute at least up to your employer's maximum match — generally 6% of your compensation.

If your employer doesn't match, 401(k) plans are still a great way to get tax benefits with each paycheck deferral and gain access to a wide variety of investment options. One exception — if your employer doesn't match, and you plan to contribute less than $7,500, an IRA may be the better choice.

What is a 401(k)?

A 401(k) is an employer-sponsored retirement savings account. You contribute a portion of each paycheck — before or after taxes depending on the plan type — and that money is invested and grows over time. You can only open a 401(k) through your employer; if your employer doesn't offer one, you'll want to start with an IRA instead.

The name comes from Section 401(k) of the IRS tax code. Not exactly exciting, but the tax benefits certainly are.

2026 Contribution Limits

Start with 6% of your salary. If you can afford more, do it — especially if your company offers an employer match. If you can't afford 6%, start with $50 or $100 per month. Whatever you can.

The IRS increased the maximum employee 401(k) contribution limit to $24,500 for 2026, up from $23,500 in 2025. Catch-up contributions also increased:

  • Age 50+: an extra $8,000, for a total of $32,500

  • Age 60–63 ("super catch-up"): an extra $11,250 instead of the standard catch-up, for a total of $35,750 (if your plan allows it)

The combined employee + employer contribution limit (the "415(c) limit") is $72,000 for 2026.

New rule for high earners in 2026: if your FICA wages exceeded $150,000 in the prior year, catch-up contributions must be made as Roth (after-tax) rather than pre-tax. Check with your plan administrator if this applies to you.

Not sure how much to contribute to hit your retirement goals? Use our nest egg calculator to run the numbers.

Traditional vs. Roth 401(k)

The biggest difference between a Roth and a traditional 401(k) is when you get your tax break.

  • Traditional 401(k): contributions are pre-tax, reducing your taxable income today. You pay taxes when you withdraw in retirement.

  • Roth 401(k): contributions are after-tax, so you get no deduction now — but qualified withdrawals in retirement are completely tax-free.

Tough call. General rule of thumb: if you're early in your career or in a lower tax bracket, lean Roth — you lock in today's lower tax rate and get decades of tax-free growth. If you're in a higher bracket and expect to be in a lower one in retirement, traditional makes more sense. When in doubt, splitting contributions between both is a perfectly valid strategy.

Employer Match — Free Money

If your employer offers a match, contribute enough to get the full match before doing anything else. This is the closest thing to free money that exists in personal finance.

A common match is 100% of your contributions up to 6% of your salary. So if you earn $80,000 and contribute 6% ($4,800), your employer adds another $4,800. That's an instant 100% return on your investment before the market does anything.

If you're not contributing enough to get the full match, you're leaving part of your compensation on the table.

Early Withdrawal Rules

A 401(k) is a retirement account, which means there are rules about when you can access the money.

  • Age 59½: you can withdraw without penalty

  • Before 59½: withdrawals are subject to a 10% early withdrawal penalty plus ordinary income taxes

  • Age 73: Required Minimum Distributions (RMDs) kick in — the IRS requires you to start withdrawing a minimum amount each year

There are some exceptions to the early withdrawal penalty — things like disability, certain medical expenses, and first-time home purchases (though the last one doesn't apply to 401(k)s the way it does to IRAs). In general, treat your 401(k) as untouchable until retirement.

Investment Choices

Most 401(k) plans offer a range of mutual funds, index funds, and target-date funds. The specific options depend on your employer's plan, but you'll typically see:

  • Target-date funds: the simplest option — pick the fund closest to your expected retirement year (e.g., "Target 2050 Fund") and it automatically adjusts its asset mix as you age. Set it and forget it.

  • Index funds: low-fee funds that track a broad market index like the S&P 500. If your plan has them, these are often the best choice for most people.

  • Actively managed funds: higher fees, and most don't beat index funds over the long run. Use with caution.

Whatever you choose, pay attention to the expense ratio — the annual fee charged by the fund. Even a difference of 0.5% per year compounds significantly over a 30-year career. Aim for funds with expense ratios under 0.20%.

What Happens to Your 401(k) When You Leave a Job?

You have a few options:

  • Leave it with your old employer — fine for the short term, but you lose easy access and may end up with accounts scattered across multiple old employers

  • Roll it over to your new employer's plan — simple, keeps everything consolidated

  • Roll it over to an IRA — often the best option; gives you more investment choices and control. See our IRA guide for details.

  • Cash it out — almost always a bad idea. You'll owe income taxes plus the 10% early withdrawal penalty if you're under 59½.

401(k) vs. IRA — Which Should You Prioritize?

Both are great. The general priority order:

  1. Contribute to your 401(k) up to the employer match (free money first)

  2. Max out an HSA if you have a qualifying high-deductible health plan

  3. Max out an IRA ($7,500 in 2026)

  4. Go back and max out your 401(k) ($24,500 in 2026)

If your employer doesn't offer a match, starting with an IRA first can make sense — especially if your 401(k) plan has limited investment choices or high-fee funds.

Source: IRS Notice 2025-67