A 401(k) is an employer-sponsored retirement savings account that lets you invest pre-tax dollars, reducing your taxable income today while your money grows tax-deferred until retirement. If your employer offers a match, it's the closest thing to free money in personal finance — and not taking it is leaving part of your compensation on the table.
Invest $100/Week Into These 3 ETFs To Retire Rich | NerdWallet
Source: NerdWallet
Use our 401(k) Calculator to see exactly how your contributions grow over time with your specific employer match and investment return assumptions.
How a 401(k) Works
- You elect a contribution percentage (e.g., 6% of your salary)
- That amount is deducted from your paycheck before taxes
- The money is invested in funds you choose from your plan's menu
- Your investments grow tax-deferred — no taxes on dividends or capital gains while in the account
- In retirement (59½+), you withdraw money and pay ordinary income tax on it
The tax benefit: If you earn $75,000 and contribute $7,500 (10%), your taxable income drops to $67,500. At a 22% marginal rate, that's $1,650 in immediate tax savings — plus decades of tax-deferred growth.
2026 Contribution Limits
| Type | 2026 Limit |
|---|---|
| Employee contribution (under 50) | $23,500 |
| Catch-up contribution (50–59 and 64+) | +$7,500 = $31,000 |
| Super catch-up (60–63, SECURE 2.0) | +$11,250 = $34,750 |
| Total including employer contributions | $70,000 |
The SECURE 2.0 Act introduced a "super catch-up" for ages 60–63 starting in 2025, allowing an even larger contribution during the final years before traditional retirement age.
Employer Match — The Most Important Feature
An employer match is free money. The most common structure is a 50% match on up to 6% of salary — meaning if you contribute 6%, your employer adds 3%. That's an instant 50% return on that portion of your contribution.
Common match structures
| Match Type | Your Contribution | Employer Adds | Total |
|---|---|---|---|
| 50% match up to 6% | 6% ($4,500) | 3% ($2,250) | 9% ($6,750) |
| 100% match up to 4% | 4% ($3,000) | 4% ($3,000) | 8% ($6,000) |
| 100% match up to 3% | 3% ($2,250) | 3% ($2,250) | 6% ($4,500) |
Rule #1: Always contribute at least enough to get the full employer match. Not doing so is declining part of your compensation.
Vesting schedules: Many employers require you to stay for 2–6 years before their match is fully "vested" (yours to keep). Check your plan's vesting schedule before leaving a job.
Traditional vs. Roth 401(k)
Many employers now offer both options. The choice mirrors the Roth vs. Traditional IRA decision:
- Traditional 401(k): Pre-tax contributions, taxed on withdrawal. Better for high earners who want to reduce taxable income now.
- Roth 401(k): After-tax contributions, tax-free withdrawals. Better for younger investors and those expecting higher tax rates in retirement.
Unlike Roth IRAs, Roth 401(k)s have no income limits — high earners can contribute to a Roth 401(k) even if they're above the Roth IRA income threshold.
What to Invest In
Most 401(k) plans offer a limited menu of mutual funds. Look for:
- Low-cost index funds with expense ratios below 0.10%
- Target-date funds (e.g., "2055 Fund") for a one-fund solution that automatically adjusts allocation
- Avoid actively managed funds with expense ratios above 0.50%
If your plan only offers high-fee funds, contribute enough to get the match, then direct additional retirement savings to a Roth IRA with better fund options.
Withdrawal Rules
- Normal withdrawals: Age 59½+, taxed as ordinary income
- Required Minimum Distributions (RMDs): Must start at age 73 (SECURE 2.0)
- Early withdrawal: Before 59½, subject to 10% penalty plus income taxes (with some exceptions)
- 72(t) distributions: Allows penalty-free early withdrawals using a specific schedule (for early retirees)
- Loans: Many plans allow borrowing up to 50% of vested balance or $50,000 — but this is generally a bad idea as it removes money from compounding
FAQ
What happens to my 401(k) when I leave a job?
You have four options: leave it with your former employer, roll it into your new employer's plan, roll it into an IRA, or cash it out (not recommended — triggers taxes and a 10% penalty if under 59½).
Can I contribute to both a 401(k) and an IRA?
Yes. The contribution limits are separate. You can max both a 401(k) ($23,500) and a Roth IRA ($7,000) in the same year for a total of $30,500 in tax-advantaged retirement savings.
What's the difference between a 401(k) and a 403(b)?
A 403(b) is the equivalent of a 401(k) for employees of nonprofits, schools, and government organizations. The contribution limits and rules are nearly identical.
Should I increase my 401(k) contribution or pay off debt?
Always get the full employer match first. After that, pay off high-rate debt (above 7–8%) before increasing 401(k) contributions beyond the match. See our debt payoff guide for the full sequence.
The 401(k) is the most powerful retirement savings tool most Americans have access to — especially with an employer match. Contribute at least enough to get the full match, choose low-cost index funds, and increase your contribution rate by 1% each year until you're saving 15% of your income. That's the entire 401(k) strategy.
