What is a 401(k) plan?

How does a 401(k) work?

A 401(k) is a way to save for retirement through your job. You choose a percentage of your paycheck to contribute, and your employer automatically puts that money into your 401(k) account each pay period. You then decide how to invest your savings using the options in your plan. The more you save and invest, the more money you can potentially build for your future.

Because a 401(k) is meant for retirement, your money is generally expected to stay invested until at least age 59½. You may owe taxes and penalties if you withdraw funds early.

What’s the difference between a traditional 401(k) and a Roth 401(k)?

Your plan may let you choose between traditional and Roth contributions. Both can help you save for retirement—the main difference is when you get the tax benefit. The right choice depends on your situation and goals. Some people use a mix of both.

• Traditional 401(k)—Your contributions come out of your paycheck before taxes. This can lower your taxable income today, and you don’t pay taxes until you withdraw money in retirement.
• Roth 401(k)—Your contributions are taken out after taxes. You don’t get a tax break now, but your money has the potential to grow tax free, and qualified withdrawals in retirement are generally tax free.¹

Here’s an example to illustrate how deferring taxes may help your savings grow faster than in a regular taxable account:

1  Starting amount—You begin with $10,000 in your account.

2  Annual contributions—You add $1,000 every year for 20 years.

3  Investment growth—Your money earns about 8% per year on average.

4  After 20 years—In a 401(k), you don’t pay taxes each year on investment earnings, so your money stays invested and can grow faster. You could end up with about $23,000 more in a tax-deferred 401(k) than in a regular taxable account.²

Keep in mind, however, that taxes can greatly reduce the amount you end up with in a tax-deferred account if you’re in the same or a higher tax bracket in retirement. This means your choice between tax-deferred and after-tax savings may depend on whether you expect your tax rate to be lower or higher in retirement.

What’s an employer match?

Many employers help you save even more by matching some of the money you put into your retirement account. This is extra money that goes straight into your account and can help your savings grow faster. If you can, try to contribute at least enough to get the full match—otherwise, you may be missing out on money your employer is offering. Over your career, these matching dollars can really add up.

One common match formula for companies is 100% of the first 6% of your pay. This means that:

• If you earn $60,000 and contribute 3% ($1,800), your employer contributes another $1,800 (100% of the 3% you put in)—for a total contribution of $3,600.
• If you contribute 6% ($3,600), your employer contributes another $3,600 (100% of the 6% you put in)—for a total contribution of $7,200.
• If you contribute 8% ($4,800), your employer still contributes 6% ($3,600), because that’s the maximum match—for a total contribution of $8,400.

How can compound interest help grow your 401(k)?

One big benefit of a 401(k) is that your savings have the opportunity to increase through investing. When your investments earn money, those earnings can also earn money over time. This is called compounding, and it can help your savings build up faster. The earlier you start contributing and investing, the more time your money has to potentially grow.

See how compounding can help increase your retirement savings over time.

How much can you contribute to your 401(k)?

You get to decide how much to save from each paycheck, but the IRS sets a yearly maximum. For 2026, those limits are:³

• If you’re under 50, you can contribute up to $24,500 (this includes traditional, Roth, or a mix of both)
• If you’re 50 or older, you can contribute up to $32,500 (the $24,500 regular limit plus an extra $8,000 catch-up contribution)⁴
• If you’re age 60–63 and your plan offers a super catch-up, you may be able to contribute up to $35,750 (thanks to a higher catch-up limit of $11,250 instead of $8,000)
• There’s also a separate limit of $72,000 on total employee and employer contributions (or more if catch-up applies).

It’s a good idea to review how much you’re putting away each year to see if you can save even a little more, especially if you get a raise or become eligible for catch-up contributions. A small increase may help you get closer to your retirement goals.

What investments can you pick for your 401(k)?

Most 401(k) plans offer a mix of investments so you can choose what fits your goals, your comfort with risk, and your time until retirement. If you’re not sure where to start, many plans offer simple, professionally managed options:

• Target-date funds (TDFs): These funds adjust for you automatically, so you don’t need to pick or rebalance individual investments yourself. You choose a fund with a year close to when you plan to retire (like 2040 or 2055). The fund starts with more stocks for growth and automatically shifts toward more bonds and cash as you approach that year.
• Target-risk funds: This is an easy way to invest based on how comfortable you are with ups and downs in the market. You choose a fund based on your risk level (conservative, moderate, or aggressive). The fund keeps a mix of stocks, bonds, and cash that matches that level, so you don’t have to rebalance on your own.

Some 401(k) plans choose an investment for you if you don’t pick one yourself. This is called a default investment, and it’s often a target-date fund or a target-risk fund. Your plan may also offer managed accounts, which usually cost more but provide you with a personalized investment strategy and professional guidance.

Why save in a 401(k)?

A 401(k) can make saving for your retirement almost effortless, since money is automatically taken from your paycheck and invested for you. Your employer may add extra money to your account through matching contributions, and tax benefits can help your savings grow even more. The earlier you start, the more time your money has to build on itself through compounding.

FAQs

What is a 401(k) and how does it work?

A 401(k) is a retirement savings plan you get through your employer. You choose a percentage of each paycheck to contribute, and that money is automatically deposited into your 401(k) account. The plan usually offers a variety of investment options, and you decide how to invest your savings. Because it’s meant for retirement, your money is generally expected to stay invested until at least age 59½, or you may owe taxes and penalties if you withdraw early.

How much should you contribute to your 401(k)?

You decide how much to save from each paycheck, up to IRS annual limits. For 2026, you can contribute up to $24,500 if you’re under 50, and up to $32,500 if you’re 50 or older with catch‑up contributions. It’s a good idea to review your savings regularly and consider increasing your contributions when you get a raise or become eligible for catch‑up contributions. If you can, try to contribute at least enough to get the full employer match, if offered.

What is an employer match in a 401(k)?

An employer match is extra money your employer puts into your 401(k) based on how much you contribute. For example, a common formula is 100% of the first 6% of your pay. If you earn $60,000 and contribute 6% ($3,600), your employer adds another $3,600, doubling your contribution to $7,200. Contributing at least enough to receive the full match helps your savings grow faster over time.

Should you choose a Roth 401(k) or a traditional 401(k)?

The main difference is when you get the tax benefit. With a traditional 401(k), contributions come out of your paycheck before taxes, lowering your taxable income now; you pay taxes later when you withdraw in retirement. With a Roth 401(k), contributions are made after taxes, so you don’t get a tax break today, but your money can grow tax free, and qualified withdrawals are generally tax free. The right choice depends on your current tax situation, future expectations, and goals, and some people use a mix of both.

1 A qualified distribution from a designated Roth account is a payment made after a participant has attained age 59½ (or after death or disability) and after the designated Roth account in the plan has been established for at least 5 years. In general, in applying the 5-year rule, count from January 1 of the year the first contribution was made to the designated Roth account. Participants should contact their plan consultant or financial or tax advisor for specific details on the 5-year rule and whether any special rule may apply. 2 This is a hypothetical illustration used for informational purposes only. The marginal tax bracket used is 25%. This lump-sum, after-tax figure doesn’t account for the possible change in tax bracket that might occur due to a lump-sum distribution of the taxable amount, nor does it take into effect any applicable tax penalties. It does not consider expenses associated with investing. There is no guarantee that the results shown will be achieved, and the assumptions provided may not be reflective of your situation. 3 Amounts are evaluated each year and are subject to change.