401(k)

A 401(k) is a retirement savings account offered through an employer, named for the section of the tax code that created it in 1978. You choose a percentage of each paycheck to set aside, the money goes into investments you pick from the plan's menu, and taxes are deferred (or, in the Roth version, prepaid) until retirement. Many employers add matching contributions on top.

What began as an obscure tax provision has become the main way Americans save for retirement. As traditional pensions faded from the private sector, the 401(k) and its cousins took their place: 403(b) plans for schools and nonprofits, 457(b) plans for state and local government workers, and the Thrift Savings Plan for federal employees all follow the same basic rules and share the same contribution limits ¹.

The design puts most of the decisions on you: whether to join, how much to save, what to invest in, and what to do with the account when you change jobs. This article walks through each decision, and retirement planning shows where the 401(k) fits in the larger picture.

How a 401(k) works#

You sign up through your employer and elect a deferral rate, say 6 percent of pay. That amount comes out of each paycheck before income tax is calculated and lands in your account, where it is invested in the funds you selected. Most plans offer a menu of mutual funds, and target-date funds (which shift gradually from stocks toward bonds as a chosen retirement year approaches) are the most common default. The account grows without annual tax on dividends or gains; ordinary income tax comes due as you withdraw the money later.

Increasingly, joining is not even a decision. Many employers enroll new hires automatically at a default saving rate unless they opt out, and federal law now requires most newly created plans to work that way: a 401(k) plan established after December 29, 2022 generally must enroll eligible workers automatically, beginning with its 2025 plan year, at a starting rate between 3 and 10 percent of pay that then rises one point a year until it reaches at least 10 percent (and no more than 15) ⁹. You can decline, pick a different rate, or withdraw the first automatic contributions within 90 days; church and governmental plans, businesses less than 3 years old, and employers that normally have 10 or fewer employees are excepted ⁹. Contributions can only come from payroll, which is one reason the habit sticks: the money is saved before it reaches your checking account.

Sources for this section: [9]

Contribution limits for 2026#

The IRS adjusts the limits most years for inflation. For 2026 ¹²:

The employee limit is per person, not per job, so deferrals to two employers' plans in the same year count against one $24,500 ceiling. Catch-up contributions covers the age-based extras in detail, including the higher amount for people aged 60 through 63 that plans may offer.

One rule is new in 2026: if your Social Security wages from an employer were more than $150,000 in 2025, any catch-up contributions to that employer's plan must now go in as Roth (after-tax) money rather than pre-tax ². The change, part of the SECURE 2.0 law, mainly affects higher earners who counted on the up-front tax deduction for their catch-ups.

Sources for this section: [1] [2]

Employer match and vesting#

Most large plans match some portion of what you contribute. A common formula is 50 cents per dollar on the first 6 percent of pay you defer, which means a worker earning $80,000 who saves 6 percent collects $2,400 a year in matching money. A match does not count against your $24,500 employee limit, though it does count toward the $72,000 combined cap ². A full match is, in effect, an immediate 50 or 100 percent return on those dollars, which no investment can offer, and matching money not collected in a given year is simply gone.

Matching dollars may come with strings. Vesting is the schedule on which employer contributions become permanently yours; your own deferrals are always 100 percent vested immediately ³. Federal law caps how slow a schedule can be ³:

If you leave before vesting, the unvested match is forfeited. Someone weighing a job change a few months short of a cliff date may find that patience has a precise dollar value.

Sources for this section: [2] [3]

Traditional or Roth 401(k)#

Most plans now offer two tax treatments. Traditional deferrals skip income tax today and are taxed when withdrawn. Roth deferrals are taxed today, then qualified withdrawals in retirement (generally after age 59 1/2 and a five-year holding period) come out entirely tax-free. The mechanics and tradeoffs mirror the Roth IRA, with one notable difference: the Roth 401(k) has no income limit, so high earners shut out of Roth IRA contributions can still get Roth treatment at work.

Two recent changes tilt the comparison slightly. Employers may now deposit matching dollars as Roth money if the plan allows it, where the match was previously always pre-tax; a match paid as Roth counts in your taxable income for the year and is only allowed if it is fully vested when contributed ¹⁰. And since 2024, Roth accounts inside 401(k) plans no longer face required minimum distributions during the owner's lifetime, matching the Roth IRA's treatment ⁴. Which tax treatment leaves you ahead depends mostly on your tax bracket now versus in retirement, a comparison taxes in retirement can inform.

Sources for this section: [4] [10]

What the plan costs#

Every 401(k) charges fees, mostly as fund expense ratios plus plan administration costs, and small differences compound. Participants who invested in equity mutual funds through 401(k) plans paid an average expense ratio of 0.26 percent in 2024, down from 0.76 percent in 2000 ⁵. Costs vary widely by employer size, and funds inside small-company plans often cost noticeably more than the same strategies inside billion-dollar plans.

An extra half a percentage point in annual fees leaves a portfolio roughly 14 percent smaller after 30 years, so the numbers are worth finding. Plans must send you an annual fee disclosure, and each fund's expense ratio appears on the plan website. You cannot control the menu, but you can usually choose its cheaper entries, and index funds in large plans now commonly cost a few hundredths of a percent.

Sources for this section: [5]

Loans and hardship withdrawals#

Most plans let active employees borrow from their own balance. The law caps a loan at half your vested balance or $50,000, whichever is less, though plans may allow up to $10,000 even if that is more than half ⁶. Repayment runs through payroll, generally within five years, with interest paid back into your own account; loans used to buy a primary residence can run longer ⁶. The catch arrives if you leave the job with a balance outstanding: many plans require quick repayment, and an unpaid loan is treated as a taxable distribution, with penalties possible before age 59 1/2 ⁶.

A hardship withdrawal is different: money out, permanently. The IRS limits hardship distributions to an immediate and heavy financial need, such as medical bills, payments to prevent eviction or foreclosure, or funeral expenses, and to the amount necessary to meet that need ⁷. The withdrawal cannot be repaid, it is taxed as ordinary income, and a 10 percent additional tax generally applies if you are under 59 1/2 ⁷. Because the money never returns, a hardship withdrawal shrinks retirement savings in a way a repaid loan does not.

Since 2024, a plan may also offer one emergency personal expense withdrawal per calendar year, capped at $1,000, for unforeseeable or immediate personal or family emergency needs; the money still counts as taxable income but escapes the 10 percent additional tax ¹¹¹². The amount can be repaid within three years, and a second emergency withdrawal is off the table for the following three calendar years unless the first is repaid or your contributions since then at least match what remains unpaid ¹³. Starting with distributions after December 29, 2025, a plan may let you pay premiums for certified long-term care insurance covering you or your spouse straight from your account, up to the least of the premium itself, 10 percent of your vested balance, or $2,600 in 2026, again free of the 10 percent tax ²¹⁴.

Sources for this section: [2] [6] [7] [11] [12] [13] [14]

When you leave a job#

An old 401(k) does not follow you automatically. You have four choices, and there is no deadline pressure for most balances.

Leaving the money in the former employer's plan is allowed if the balance is large enough, and it preserves any unusually cheap institutional funds. Rolling it into your new employer's plan consolidates accounts and keeps everything under plan rules. Rolling it into an individual retirement account opens a nearly unlimited investment menu and gathers stray accounts in one place, though IRA fees can be higher or lower than the plan's depending on what you choose. Cashing out is the fourth option and the costliest: income tax plus, usually, a 10 percent penalty before age 59 1/2, and the loss of all future tax-advantaged growth.

Staying put is only guaranteed above $7,000: a plan can pay out a vested balance at or under that amount without your consent once you are gone ¹⁴, and any forced-out amount over $1,000 that you leave without instructions must be rolled automatically into an IRA set up in your name ¹³. If you have lost track of an account from an old job, the Department of Labor's Retirement Savings Lost and Found database, created under the SECURE 2.0 law, searches online for benefits tied to your Social Security number once you verify your identity through Login.gov; it covers private-sector employer and union plans, not IRAs or plans run by governments or certain religious organizations ¹⁵.

One timing rule matters for people retiring in their late 50s. If you leave your employer in or after the year you turn 55, that employer's plan can be tapped without the early withdrawal penalty (the rule of 55, described in retirement age), but money rolled into an IRA gives that up and generally waits until 59 1/2 ¹¹.

Rollovers come in two forms. In a direct rollover, the money moves straight between institutions and nothing is withheld. In an indirect rollover, the check comes to you, the plan must withhold 20 percent for taxes, and you have 60 days to deposit the full original amount into the new account ⁸.

Caution: In an indirect rollover you must replace the withheld 20 percent out of pocket to complete the full rollover; whatever you fail to redeposit within 60 days becomes a taxable distribution ⁸. A direct rollover avoids the whole problem, which is why most advisers and plan providers steer people toward it.

Sources for this section: [8] [11] [13] [14] [15]

Required minimum distributions#

Tax deferral ends eventually. Required minimum distributions from traditional 401(k) balances begin at age 73, with the first one delayable until April 1 of the following year, at the cost of taking two distributions in that year ⁴. If you are still working at 73 and own less than 5 percent of the company, distributions from your current employer's plan can wait until you actually retire ⁴. Roth 401(k) balances are exempt during your lifetime ⁴.

Missing a distribution triggers an excise tax of 25 percent of the shortfall, reduced to 10 percent if corrected within two years ⁴. How the annual amounts are calculated, and how the starting age rises to 75 in 2033, is covered in required minimum distributions; how RMDs fit into a broader drawdown plan is part of retirement withdrawal strategies.

Sources for this section: [4]

RetiredWiki. (2026, July 18). 401(k). https://retiredwiki.com/article/401k