What Is a 401(k)?
A 401(k) is an employer-sponsored retirement account that lets you invest a portion of your paycheck before income tax is taken out. Your money grows tax-deferred until you withdraw it in retirement, and many employers will match part of what you contribute — essentially free money.
The name comes from Section 401(k) of the U.S. tax code. It's the most common workplace retirement plan in the United States, with over 60 million active participants.
See Your 401(k) Growth
The biggest lever in a 401(k) isn't picking the right fund — it's how much you contribute and how early you start. Run your numbers:
Traditional vs. Roth 401(k)
Most employers now offer both. The difference is when you pay tax:
| Traditional 401(k) | Roth 401(k) | |
|---|---|---|
| Contributions | Pre-tax (lowers taxable income now) | After-tax |
| Growth | Tax-deferred | Tax-free |
| Withdrawals in retirement | Taxed as income | Tax-free |
| Best if | You expect a lower tax bracket later | You expect the same or higher bracket later |
A common rule of thumb: if you're early in your career and your income (and tax bracket) is likely to rise, Roth tends to win. Higher earners closer to retirement often favor Traditional because the upfront deduction is worth more.
You don't have to pick one — you can split contributions between both, as long as the combined total stays within the annual limit.
Employer Match: Don't Leave It on the Table
If your employer offers a match, contributing at least enough to capture the full match is the highest-ROI move in personal finance.
A common formula is "100% of the first 3%, then 50% of the next 2%" — meaning the employer adds up to 4% of your salary if you contribute 5%.
On a $75,000 salary, that's $3,000 a year of free money. Skipping it is equivalent to refusing a 4% raise.
2026 Contribution Limits
| Limit type | 2026 amount |
|---|---|
| Employee elective deferral (under 50) | $24,500 |
| Catch-up contribution (50+) | +$8,000 |
| Higher catch-up contribution (ages 60-63) | +$11,250 |
| Combined employee + employer | $72,000 |
These limits apply across all your 401(k) accounts combined, but the employer match doesn't count against your $24,500 cap — it sits in the higher combined ceiling. The IRS lists the 2026 elective deferral, catch-up, and defined contribution limits in its retirement plan limit update.
How Much Should You Contribute?
A few benchmarks people commonly use:
- Minimum: whatever captures the full employer match
- Standard target: 10–15% of gross pay (including the match)
- Aggressive: 20%+ if you're catching up or aiming for early retirement
If 15% feels out of reach today, start at the match level and increase by 1 percentage point each year — most plans have an "auto-escalation" setting that handles this automatically.
To see how a contribution rate maps to your real take-home paycheck, the paycheck calculator shows the pre-tax effect on what hits your bank account.
401(k) vs. IRA
These aren't mutually exclusive — most people should use both.
| 401(k) | Traditional IRA | |
|---|---|---|
| 2026 limit | $24,500 | $7,500 |
| Set up by | Employer | You (any broker) |
| Investment menu | Limited to plan options | Almost anything |
| Employer match | Yes | No |
| Income limits to contribute | None | None for traditional |
A typical priority order:
- 401(k) up to the employer match
- Max out an IRA ($7,500/yr) for better investment choice
- Go back to the 401(k) to max it out
- Taxable brokerage after both are maxed
Common Mistakes
- Not contributing enough to get the full match. This is the most expensive mistake in personal finance — usually thousands of dollars per year.
- Cashing out when you change jobs. Rolling your old 401(k) into an IRA or your new 401(k) keeps the tax shelter intact and avoids early-withdrawal penalties.
- Investing too conservatively early on. A 25-year-old in a bond fund is leaving decades of compound growth on the table.
- Forgetting fees. A 1% expense ratio sounds tiny but can erase a quarter of your final balance over 40 years. Look for index funds with expense ratios under 0.10%.
Key Takeaways
- A 401(k) is pre-tax (or Roth) retirement savings through your employer
- Always contribute enough to capture the full employer match — it's free money
- 2026 limit is $24,500 ($32,500 if you're 50+, or $35,750 if you're 60-63)
- Roth vs Traditional depends on whether your tax bracket will be higher or lower in retirement
- Most people should use a 401(k) and an IRA, in that priority order
- Use the calculator above to see how a small bump in contribution rate compounds over 30 years