This lesson is general education about U.S. personal finance, not financial, tax or investment advice. Tax rules and limits change every year; check IRS.gov or a qualified professional for your situation.
What you’ll learn
- Contributions come straight out of your paycheck, before or after tax depending on the type you choose.
- An employer match is extra pay for saving, so try to contribute at least enough to get all of it.
- In 2026 you can contribute up to $24,500, plus catch-up amounts from age 50.
- Withdrawals before age 59½ usually bring income tax plus a 10% additional tax.
A 401(k) is a retirement savings plan offered through an employer. Money goes in automatically from each paycheck, is invested in funds you choose, and grows until you retire.
Traditional or Roth contributions?
Many plans offer both:
- Traditional: contributions come out before income tax, lowering your taxable pay now. You pay tax when you withdraw in retirement.
- Roth: contributions come out after tax, so there’s no tax break today, but qualified withdrawals in retirement are tax-free.
If you expect to be in a higher tax bracket later, which is common early in a career, Roth contributions can make sense. You can split between the two.
The match
Many employers add money when you contribute. A common formula is 50% of what you put in, up to 6% of your pay.
Try the math. On a $50,000 salary, contributing 6% means $3,000 a year from you. A match of 50% on the first 6% adds $1,500 more. Contributing only 3% would leave $750 of that match unclaimed every year.
2026 limits
| Who | Employee contribution limit |
|---|---|
| Under 50 | $24,500 |
| Age 50 or older | $24,500 plus an $8,000 catch-up |
| Ages 60 to 63 | $24,500 plus an $11,250 catch-up, if the plan allows |
Employer contributions don’t count toward your own limit.
Getting money out early
Withdrawals before age 59½ are generally taxed as income and hit with a 10% additional tax, with some exceptions. Some plans allow loans, but if you leave your job, an unpaid loan can become a taxable withdrawal.
When you change jobs
Your vested balance stays yours. Our lesson on what to do with an old 401(k) covers the options. If your employer doesn’t offer a plan, or you want to save more, an IRA is the next place to look.
Common questions
What should I invest in inside my 401(k)?
Plans offer a menu of funds. Many people choose a target-date fund, which shifts gradually from stocks to bonds as the target year approaches. Check each option’s fees.
What is vesting?
Your own contributions are always yours. Employer contributions may vest over a few years, and if you leave before you’re fully vested, you can lose the unvested part.
What if my employer automatically enrolled me?
Many plans enroll new employees at a set percentage. You can change the amount, the investments or opt out, but check the match before lowering it.