What Is 401?
A 401(k) is an employer-sponsored retirement savings plan with tax advantages. Learn contribution limits, employer matching, and how to maximize your 401(k).
Definition
A 401(k) is a tax-advantaged retirement savings plan offered by employers. Employees contribute a portion of their paycheck before taxes (traditional 401(k)) or after taxes (Roth 401(k)), and the money grows tax-deferred or tax-free until retirement. Many employers match a percentage of employee contributions -- essentially free money.
For 2026, the contribution limit is $23,500 per year (or $31,000 if you are age 50 or older, thanks to catch-up contributions). The money is invested in a menu of options chosen by the employer, typically including index funds, target-date funds, and bond funds. You cannot withdraw funds before age 59 1/2 without paying a 10% penalty plus income taxes (with certain exceptions).
The 401(k) is named after Section 401(k) of the Internal Revenue Code. It was introduced in 1978 and has become the primary retirement vehicle for American workers, largely replacing traditional pensions. Roughly 70 million Americans are active 401(k) participants.
Real-World Example
Suppose your employer offers a 401(k) with a 50% match on the first 6% of your salary. If you earn $80,000 and contribute 6% ($4,800), your employer adds $2,400 -- that's a guaranteed 50% return on your contribution before any market gains. If you contribute to a traditional 401(k), the $4,800 reduces your taxable income, saving you roughly $1,200 in taxes (at a 25% marginal rate). Between the match and the tax savings, you gain $3,600 on a $4,800 contribution -- before the market does anything.
Why It Matters
A 401(k) with employer matching is the single most powerful wealth-building tool available to most workers. Not contributing enough to capture the full employer match is literally leaving free money on the table. The combination of tax-deferred growth, employer matching, and automatic payroll deductions makes the 401(k) the cornerstone of retirement planning. If you do nothing else, contribute at least enough to get the full match.
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Frequently Asked Questions
How much should I contribute to my 401(k)?
At minimum, contribute enough to capture your full employer match. Ideally, save 10-15% of your gross income for retirement. If that feels like too much, start with whatever you can afford and increase by 1% per year.
What happens to my 401(k) if I leave my job?
You have several options: leave it with your former employer, roll it into your new employer's plan, roll it into a personal IRA, or cash it out (which triggers taxes and a 10% penalty if you are under 59 1/2).
Should I choose traditional or Roth 401(k)?
If you expect to be in a higher tax bracket in retirement, Roth is better (pay taxes now, withdraw tax-free later). If you expect a lower bracket in retirement, traditional is better (deduct now, pay taxes later). Many people benefit from contributing to both.
What is a 401(k) employer match?
An employer match is when your company contributes additional money to your 401(k) based on how much you contribute. A common formula is 50% match on the first 6% of salary. This is free money and should always be maximized.
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