A 401(k) is the foundation of retirement savings for most working Americans. Named after the IRS code section that created it, it's an employer-sponsored account that lets you set aside money from each paycheck before (or after) taxes and invest it for retirement. Despite being the most common retirement vehicle, it is also the most misunderstood and underused.
What changed in 2026
- Contribution limits increased. The 2026 employee contribution limit is $23,500 ($31,000 for those age 50+ using catch-up contributions), up from prior years.
- SECURE 2.0 provisions fully in effect. Changes from the 2022 SECURE 2.0 Act are now fully implemented: auto-enrollment is required for new 401(k) plans, and additional catch-up contribution rules for ages 60–63 apply.
- Roth 401(k) employer match rule. Starting in 2026, employer matching contributions can be designated to a Roth 401(k) account if the employee elects it.
- Emergency savings accounts. Some employers now offer pension-linked emergency savings accounts alongside 401(k)s — a new option for liquid emergency needs within workplace benefits.
How a 401(k) works
You elect a contribution percentage or dollar amount per paycheck. That money goes into your 401(k) account before it hits your take-home pay (traditional) or after tax (Roth 401k). It's invested in the fund options your employer's plan provides. It grows tax-deferred or tax-free depending on the account type, until you withdraw it in retirement.
| Feature |
Traditional 401(k) |
Roth 401(k) |
| Contributions |
Pre-tax (lowers current taxable income) |
After-tax (no deduction) |
| Growth |
Tax-deferred |
Tax-free |
| Withdrawals in retirement |
Taxed as ordinary income |
Tax-free |
| RMDs |
Yes, starting at age 73 |
No (starting 2024, per SECURE 2.0) |
| Best for |
High earners now, lower rate expected in retirement |
Lower earners now, higher rate expected in retirement |
Employer match: the most important rule
If your employer matches contributions — for example, 50% of your contributions up to 6% of salary — contribute at least enough to capture the full match. A 50% match is a guaranteed 50% instant return on your contribution. No investment reliably beats that. Leaving any of that match uncaptured is leaving compensation on the table.
2026 contribution limits at a glance
| Contributor |
Limit |
| Employee contribution (under 50) |
$23,500 |
| Employee contribution (age 50+) |
$31,000 (with catch-up) |
| Employee + employer combined |
$70,000 (or 100% of compensation, whichever is less) |
| Age 60–63 special catch-up |
Higher limit — check IRS.gov for exact figure |
What to invest in inside a 401(k)
Most 401(k) plans offer a menu of mutual funds. What to look for:
- Expense ratio below 0.20% — high fees compound against you just as returns compound for you. A 1% expense ratio on a 30-year career can cost you a meaningful fraction of your ending balance.
- Index funds — look for total market or S&P 500 index funds as the core of your portfolio.
- Target-date fund — a single fund that automatically adjusts its stock/bond mix as you approach retirement. Often the best default for people who don't want to manage allocation.
Avoid: actively managed funds with expense ratios above 0.75–1%; funds with sales loads.
How to pick your contribution rate
- Start at whatever captures the full employer match. If the match is on 6% of salary, contribute at least 6%.
- Increase by 1% each year (or with each raise) until you reach the IRS limit or your target savings rate.
- Target saving 15% of gross income for retirement across all accounts (401k + IRA) as a long-term benchmark.
What to do when you change jobs
| Option |
When to use |
| Roll over to new employer's 401(k) |
New plan has good investment options |
| Roll over to a traditional IRA |
Want more investment flexibility |
| Leave it at the old plan |
Old plan has exceptional low-cost funds |
| Cash it out |
Almost never — taxes + 10% penalty + lost compounding |
Cashing out wipes out tax benefits, triggers ordinary income tax plus a 10% early withdrawal penalty, and permanently removes years of compounding growth.
Common mistakes
Contributing below the match threshold. Contributing 3% when the employer matches up to 6% leaves free money unclaimed.
Ignoring fund expenses. A plan's default fund may have a high expense ratio. Spend 10 minutes reviewing the fund lineup and switching to lower-cost options if available.
Never rebalancing. Over time, strong stock returns push equity allocation above your target. An annual rebalance (or a target-date fund) keeps your risk profile on track.
Taking loans against your 401(k). 401(k) loans reduce your invested balance, cost you compounding growth on that amount, and create risk if you leave the job — the balance becomes due quickly.
What to skip
- Cashing out when changing jobs — this is the single most damaging 401(k) mistake.
- Ignoring your 401(k) until "you can afford to save more." Even 3% with an employer match beats waiting until you can afford 10% alone.
- Putting all contributions in company stock. Concentration risk in a single stock (especially your employer's) is genuinely dangerous to retirement security.
FAQ
What happens to my 401(k) if I leave my job?
The money is yours (for vested amounts). You can roll it over to an IRA or a new employer's 401(k), leave it where it is, or (costly) cash it out.
Can I contribute to both a 401(k) and an IRA?
Yes. The contribution limits are separate. A common strategy is to contribute to the 401(k) up to the employer match, then max a Roth IRA, then return to the 401(k) for additional contributions.
When can I withdraw from a 401(k) without penalty?
Age 59½ is the standard penalty-free withdrawal age. The rule of 55 allows penalty-free withdrawals if you leave your job in or after the year you turn 55.
What is vesting?
Vesting determines when employer contributions are fully "yours." You always own your own contributions immediately. Employer match contributions may vest over 2–6 years depending on the plan.
Where to go next