This is general information, not financial advice. Limits change yearly — check IRS.gov.

For most American workers, retirement saving runs through one account: the 401(k). Here's what it actually does.

What it is

A 401(k) is an employer-sponsored plan that lets you set aside part of each paycheck for retirement — usually before income tax — with the money growing tax-deferred until you withdraw it. You pick a contribution rate; your employer deducts it automatically and invests it in an account in your name.

The employer match — don't leave it behind

Many employers match part of what you contribute — a common formula is 50 cents per dollar up to 6% of pay, effectively a 3% raise if you contribute enough to capture it. Contributing at least enough to get the full match is the first rule of 401(k) saving: not doing so is declining part of your pay. Match formulas vary; your plan documents spell out yours.

Traditional vs. Roth

Most plans offer two types. A traditional 401(k) takes contributions pre-tax (lowering today's taxable income); withdrawals in retirement are taxed as income. A Roth 401(k) takes after-tax dollars now, but qualified withdrawals later — including all the growth — are tax-free, which tends to favor those who expect a higher tax rate in retirement. You can split between the two within the same overall limit.

2026 limits

The IRS adjusts limits yearly. For 2026, per the IRS:

  • Employee contribution limit: $24,500 (up from $23,500 in 2025)
  • Catch-up, age 50+: an extra $8,000 (total $32,500)
  • "Super catch-up," ages 60–63 (SECURE 2.0): an extra $11,250 instead of the standard catch-up (total $35,750)
  • Combined employer + employee cap: $72,000

Vesting

Your own contributions are always 100% yours. Employer contributions often vest over time — you may need to stay a few years before that money is fully yours (via "cliff" or "graded" schedules). Leave before you're vested and you forfeit the unvested employer portion.

Investments and fees

Plans offer a menu — usually mutual funds and target-date funds (which automatically grow more conservative as your retirement year nears). Fees matter more than people realize: an expense ratio of 1% versus 0.1% on a $200,000 balance costs about $1,800 more a year, compounding over a career. Favor low-cost index options where available.

Getting money out

Withdraw from a traditional 401(k) before age 59½ and you generally owe a 10% penalty plus income tax, with limited exceptions. Many plans allow loans (typically up to 50% of your vested balance or $50,000), repayable usually within five years — but leave your job with one outstanding and it may be taxed as a distribution. From age 73, traditional 401(k)s require minimum distributions (RMDs); Roth 401(k)s no longer require them in the owner's lifetime (a SECURE 2.0 change effective 2024).

Changing jobs

When you leave, you can usually keep the old account where it is, roll it into your new employer's plan, roll it into an IRA (broadest investment choice, keeps the tax treatment), or cash out (taxes plus penalty if under 59½ — generally the worst option). Use a direct rollover to avoid mandatory withholding.

Takeaways

  • Capture the full match first — it's a guaranteed return nothing else matches.
  • Mind the fees — small percentages compound into real money.
  • Raise your contribution over time — use auto-escalation if offered, or bump it after each raise.
  • A target-date fund is a reasonable low-maintenance default.
  • Track old accounts — consolidating into a rollover IRA keeps things simple.

Limits, catch-ups and RMD ages can change. Verify current figures at IRS.gov and consult a professional for your own situation.