What is a 401(k)?

A 401(k) is an employer-sponsored retirement account that lets you set aside part of your paycheck to invest for retirement, usually before taxes are taken out. The money grows tax-deferred, and many employers add a matching contribution on top of what you save.

The name comes from the section of the Internal Revenue Code (IRC) that created it. A 401(k) is a type of defined contribution plan, which means your eventual balance depends on how much you and your employer put in and how your investments perform, not on a fixed pension formula. You choose your contributions and pick from the investment options your plan offers, typically a menu of mutual funds and target-date funds.

How a 401(k) Works

When you enroll, you decide what percentage of each paycheck to contribute. That amount is deducted automatically and invested in the funds you select. Your contributions and any investment gains stay inside the account, sheltered from taxes, until you withdraw them in retirement.

Three features do most of the heavy lifting: the tax treatment of your contributions, the employer match, and the vesting schedule that determines when that match is truly yours.

Traditional vs. Roth 401(k)

Most plans let you contribute in one of two ways, and some let you split between both.

Traditional (pre-tax) contributions come out of your paycheck before income tax. They lower your taxable income in the year you make them, and the whole balance grows tax-deferred. You pay ordinary income tax later, when you withdraw the money in retirement.

Roth contributions come out after tax, so they don’t reduce your taxable income now. In exchange, qualified withdrawals in retirement, including all the investment growth, come out completely tax-free. Roth 401(k) contributions tend to make sense when you expect to be in a higher tax bracket later than you are today.

The core question is when you’d rather pay the tax. Pre-tax defers it to retirement; Roth pays it now to skip it later. Many savers hold both to give themselves flexibility over which account to draw from once they retire.

The Employer Match

An employer match is money your company contributes based on what you put in. A common formula is 50% of your contributions up to 6% of your salary, or a dollar-for-dollar match up to 3% to 5%. If your employer offers a match and you contribute enough to earn the full amount, you’ve effectively given yourself an immediate return on that money before it’s even invested.

Passing up an available match leaves guaranteed compensation on the table, which is why a common first step in retirement saving is contributing at least enough to capture the full match.

Vesting

Your own contributions are always 100% yours. The employer match, though, may come with a vesting schedule, meaning you have to stay at the company for a set period before that money fully belongs to you. Some plans vest immediately, others use a graded schedule (for example, 20% per year over five years) or a cliff schedule (0% until a certain date, then 100%). If you leave before you’re fully vested, you forfeit the unvested portion of the match.

401(k) Contribution Limits for 2026

The IRS sets how much you can contribute each year, and the limits usually rise with inflation. For 2026, the elective deferral limit (the amount you can contribute from your own paycheck) is $24,500 for savers under 50.

Older savers can add a catch-up contribution on top of that:

The larger $11,250 catch-up for ages 60 through 63 comes from the SECURE 2.0 Act. It applies only during those four years; at 64 the catch-up reverts to the standard $8,000.

There’s also a separate, higher ceiling on total contributions from all sources. Combining your deferrals, the employer match, and any after-tax contributions, the total defined contribution limit for 2026 is $72,000 (plus catch-up amounts if you’re eligible). This higher limit is what makes strategies like the mega backdoor Roth possible for people whose plans allow after-tax contributions.

When You Can Withdraw From a 401(k)

A 401(k) is built for retirement, and the withdrawal rules reflect that. The key age is 59 and a half. Once you reach it, you can take money out without penalty, though traditional (pre-tax) withdrawals are still taxed as ordinary income.

Withdraw before 59 and a half and you generally owe a 10% early withdrawal penalty on top of the ordinary income tax, with some exceptions (certain hardships, disability, and substantially equal periodic payments under IRC Section 72(t), among others). One useful exception is the “rule of 55”: if you leave your job in or after the year you turn 55, you can take penalty-free withdrawals from that employer’s 401(k).

At the other end, you can’t defer taxes forever. Required minimum distributions (RMDs) on traditional balances currently begin at age 73, forcing you to start drawing the account down. Roth 401(k) balances are no longer subject to RMDs during the original owner’s lifetime.

Because withdrawal timing, taxes, and account type all interact, it helps to see how the pieces fit across a full retirement timeline. You can model your 401(k) contributions, employer match, and withdrawal strategy in ProjectionLab to see how different savings rates and account mixes affect your long-term plan.

Frequently Asked Questions

How much can I contribute to a 401(k) in 2026? You can contribute up to $24,500 from your own paycheck if you’re under 50. Savers aged 50 to 59 and 64 or older can add an $8,000 catch-up for $32,500 total, and those aged 60 to 63 get a larger $11,250 catch-up for $35,750 total. Employer contributions are on top of these amounts, up to a combined limit of $72,000.

Does the employer match count toward the contribution limit? Not toward your personal $24,500 deferral limit. The match counts only toward the higher $72,000 total defined contribution limit for 2026, which covers your contributions, the employer match, and any after-tax contributions combined. So a full employer match never reduces how much you can personally defer.

What’s the difference between a traditional and Roth 401(k)? A traditional 401(k) uses pre-tax money, lowering your taxable income now, and you pay ordinary income tax when you withdraw in retirement. A Roth 401(k) uses after-tax money, so there’s no upfront deduction, but qualified withdrawals in retirement are tax-free. Traditional favors people who expect a lower tax rate later; Roth favors those who expect a higher one.

At what age can I withdraw from a 401(k) without a penalty? Age 59 and a half. Before that, withdrawals generally trigger a 10% early withdrawal penalty plus income tax, unless an exception applies. The rule of 55 lets you withdraw penalty-free from your current employer’s plan if you leave your job in or after the year you turn 55. Traditional withdrawals are still taxed as ordinary income regardless of age.

What happens to my 401(k) if I change jobs? Your vested balance stays yours. You typically have four options: leave it in your old employer’s plan, roll it into your new employer’s 401(k), roll it into an individual retirement account (IRA), or cash it out. Rolling it over into a new 401(k) or an IRA keeps the money tax-deferred and avoids the taxes and penalties that a cash-out usually triggers. Any unvested employer match, however, is forfeited when you leave.

How does a 401(k) compare to an IRA? A 401(k) is offered through your employer and has a much higher contribution limit ($24,500 in 2026 versus $7,500 for an IRA, or $8,600 if you’re 50 or older). An IRA is opened on your own and usually offers a wider range of investment choices. Many people use both: contributing to the 401(k) at least up to the match, then adding an IRA for more flexibility.