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A 401(k) is a retirement account offered by your employer. You decide a percentage of each paycheck to contribute, and that money goes directly into the account before it ever hits your checking account.
The two flavors
- Traditional 401(k), you contribute pre-tax money. You pay income tax later, when you withdraw in retirement.
- Roth 401(k), you contribute post-tax money. You pay no tax on withdrawals in retirement, including the gains.
Employer match
Many employers match a portion of what you contribute, for example, 50% of the first 6% you put in. If you make $80,000 and contribute 6%, that is $4,800. Your employer adds $2,400 on top. That is a 50% return on your money before any market moves.
Not contributing enough to capture the full match is one of the most expensive small mistakes in personal finance. It is, almost literally, leaving free money on the table.
Vesting
Some employers require you to stay at the company for a few years before their matching contributions are fully yours. If you leave early, you forfeit the unvested portion. Read your plan document.
Investment choices
Inside a 401(k), you choose from a menu of funds, usually a mix of stock funds, bond funds, and target-date funds. A target-date fund automatically adjusts its mix as you age, becoming more conservative as you near retirement. They are a reasonable default for people who do not want to tinker.
What this lesson is NOT
This is not investment or tax advice, and it does not tell you how much to contribute or which funds to choose. Match formulas, vesting schedules, and fund menus vary by employer, so check your own plan documents. It is also not a reason to contribute past the match while you are still carrying high-interest debt.
Frequently asked questions
How much should I contribute to my 401(k)?
A common starting point is contributing at least enough to capture your full employer match. That's effectively free money. Many financial frameworks suggest aiming for 10-15% of pre-tax income across all retirement accounts, but the right number depends on income, expenses, and time horizon. Starting somewhere is more important than starting at the perfect number.
What's the 401(k) contribution limit for 2026?
For 2026, the 401(k) employee contribution limit is $24,500 (or $32,500 if you're 50 or older with the standard catch-up; $35,750 for ages 60-63 under the SECURE 2.0 super catch-up if your plan allows it). The combined employer + employee + after-tax total limit is $72,000: the IRS § 415(c) overall cap. These limits are adjusted annually for inflation by the IRS.
What happens to my 401(k) when I leave my job?
You generally have four options: leave it with your old employer's plan (if balance allows), roll it into your new employer's 401(k), roll it into an IRA, or cash it out (rarely the right move, since it triggers taxes and a 10% early-withdrawal penalty if under 59½). Rolling to an IRA usually gives you the most investment options and lowest fees.
Should I contribute to a Roth 401(k) or Traditional 401(k)?
The same logic as Roth vs Traditional IRA applies: Roth makes sense if you expect a higher tax rate in retirement, Traditional if you expect a lower one. Many savers split the difference between both within their 401(k) plan to hedge. Most plans offer both options now, though employer matches typically go into the Traditional bucket regardless.
What's a 401(k) vesting schedule?
Vesting determines when your employer's matching contributions actually become yours. Some employers offer immediate vesting; others require 3-6 years of service before the match is fully yours. Your own contributions are always 100% vested immediately. Always check your plan document. Leaving before fully vested can mean leaving real money behind.
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
What is a 401(k)?
- 2.
If your employer matches 50% of your first 6%, and you contribute 6% of your $80,000 salary, how much does the EMPLOYER add?
- 3.
What is 'vesting' in a 401(k)?
- 4.
What's the 2026 401(k) contribution limit for employees under age 50?
- 5.
What happens to your 401(k) when you change jobs?
- 6.
Should you contribute to a 401(k) even if you're skeptical of stock investments?
0 of 6 answered