A 401(k) plan is an employer-sponsored retirement plan that allows you to decide on monthly contributions to a tax-advantaged investment account. Roughly 70 million Americans contribute to a 401(k), according to data from the Investment Company Institute, totaling nearly $7 trillion in assets.
A traditional 401(k) is tax-deferred, meaning contributions are deducted from your paycheck before income taxes are applied, which lowers your taxable income for the year and allows the money to grow tax-free. In most cases, employers will match some or all of your contributions.
The trade-off is that you'll pay income tax when you withdraw the money in retirement, when you are likely to be in a higher bracket.
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How does a 401(k) work?
A traditional 401(k) plan is offered through your employer, with contributions taken directly from your pre-tax paycheck, based on your elections. The money is invested in stocks, bonds, mutual funds and other asset classes, although you'll have a limited set of options selected by your employer's plan.
You might need to sign up for your 401(k) plan, though a growing number of companies automatically enroll new employees to encourage participation.
Once your account has been created, review your asset allocation and make sure it aligns with your goals. Most 401(k)s are not portable, so once you leave the company, you can no longer make contributions. You can leave the plan alone, roll it over into a new 401(k) or IRA or cash out the balance.
The IRS requires seniors to begin making annual withdrawals from their 401(k) plans at age 73, whether or not they are in financial need. (Roth 401(k) accounts are exempt.) The amount of your individual required minimum distribution (RMD) depends on your age, marital status and how much you have in your combined retirement accounts.
Close to 90% of companies that offer a 401(k) will match their employees' contributions up to a certain amount. You might put 10% of your paycheck in a 401(k), but your employer match only covers the first 6%.
It can be either a full dollar-for-dollar match or a partial match — for example, 50 cents for every dollar you contribute — or a combination of the two.
Matching contributions may not be 100% vested immediately, so you may forfeit a portion if you leave the plan or the company. Full vesting can happen gradually, when it's known as "graded vesting," or all at once, when it's called "cliff vesting. In 2025, close to 16% of employers required workers to wait six years before their matches vested 100%, according to the Plan Sponsor Council of America.
Some companies will contribute non-matching contributions, which don't require the employee to contribute anything
Types of 401(k) plans
While all 401(k) plans are employer-sponsored, there are several different kinds.
Traditional 401(k): Employees contribute a portion of their pre-tax wages, and their employer may match their contribution, either fully or partially. Taxes on contributions and earnings are withheld when withdrawals are made.
Roth 401(k): Contributions are taxed before they're deposited. While that means there's less to invest with a Roth 401(k), you won't pay taxes when you make withdrawals in retirement. That can be beneficial if you expect to be in a higher tax bracket. Roth 401(k) plans are not subject to required minimum distributions.
Safe Harbor 401(k): Employer contributions are required, whether or not the employee contributes, and employees are fully vested right away. Safe harbor plans are exempt from the nondiscrimination tests that ensure plans benefit all employees, regardless of how much they earn.
SIMPLE 401(k)
A SIMPLE (Savings Incentive Match Plan for Employees) 401(k) is designed for businesses with 100 or fewer employees who receive at least $5,000 in compensation. Like Safe Harbor plans, employers must contribute, even if a worker opts out.
If workers are covered by a SIMPLE 401(k), no other employer-sponsored retirement plan can be offered.
Solo 401(k)
If you are self-employed or run a small business with a spouse, you may be eligible for a solo 401(k) plan, also known as a one-participant plan. This allows you to enjoy the benefits of a retirement account without having an outside employer.
How much can I contribute to my 401(k)?
The IRS sets dollar limits on 401(k) contributions each year, which vary depending on the type of plan you have. In addition, workers 50 and older can make catch-up contributions, which are also subject to annual caps.
For 2026, the limit for individual contributions to a traditional 401(k) is $24,500, while the cap for combined employee and employer contributions is $72,000. (If you're over 50, you can invest an additional $8,000 in catch-up contributions. For workers age 60 to 63: special "super catch-up" contributions of up to $11,250 are available if the plan allows.
Experts recommend contributing at least as much to your 401(k) as your company will match.
You can work up to investing 10% to 15% of your income (including employer contributions), but it depends on your age, financial situation and retirement goals.
It is possible to overcontribute to your plan, though payroll departments and investment firms are usually on the lookout. If you do, you'll have to withdraw the excess and pay taxes on it.
When can I withdraw from my 401(k)?
Similar to other retirement plans, such as the 403(b) and the Thrift Savings Plan, the IRS allows qualified distributions (without penalty) starting at age 59½.
If you withdraw from a traditional plan before then, you'll pay federal and state taxes and a 10% penalty. The IRS makes some exceptions, mostly for emergencies and financial hardship.
Depending on your company, you may also be able to borrow money from your 401(k) without facing a penalty: A 401(k) loan can be for as much as 50% of your retirement savings, up to a maximum of $50,000.
If you leave a job where you were contributing to a 401(k), you have several options.
Keep your old 401(k). If you're satisfied with your investment options, you can leave your money where it is. If the account has less than $7,000, your employer also has the right to roll it into an IRA. And if there's less than $1,000, it can be cashed out and sent to you by check, though you'll pay fees and taxes.
Roll it into your new job's 401(k). You can typically transfer funds from your old account to a new plan. If it's a direct rollover, there is no penalty. If it's an indirect rollover, however, you'll receive a check made out to you and will have to transfer it into the new 401(k) within 60 days or pay penalties and taxes.
Roll the balance into an IRA. This can give you a wider range of investing options and it's easier to make penalty-free early withdrawals in an emergency.
Cash out the balance. Your employer may allow you to liquidate your 401(k), but you will have to pay a 10% penalty and any applicable income taxes. The funds can no longer be invested in a 401(k) plan may bump you into a higher tax bracket.
If you've taken out a 401 (k) loan and left your job before you've paid it back, you'll have until the next Tax Day to repay it in full or face a penalty.
Pros and cons of a traditional IRA
- Automatic investing: Contributions are automatically deducted from your paycheck, making it easy to save consistently.
- Tax-advantaged. Contributions may be fully or partially deductible (lowering your taxable income for the year) and investments grow tax-free.
- No Income cap. Anyone with earned income can contribute to a traditional 401(k)
- Employer match. Most employers will match all or some of a worker's contributions for a year
- High contribution limit: Compared to IRAs, workers can contribute significantly more to their 401(k) each year. Workers over 50 can take advantage of even higher "catchup contributions."
- Early withdrawal penalty. Withdrawals before 59½ usually mean paying a 10% penalty and income taxes
- Lack of portability. Once you leave the company, you can no longer make contributions
- Annual caps on contributions.
- Taxable withdrawals: Withdrawals are taxed as ordinary income in retirement, when your tax rate is likely higher.
- Required Minimum Distributions (RMDs): Once you turn 73, you must begin taking a minimum amount out of your 401(k) each year or face a 25% penalty tax.
401(k) vs. IRA
401(k) plans and IRAs are the two most common retirement plans in America, according to the U.S. Census Bureau. Many people have both, which can diversify their portfolio and protect them from market fluctuations.
Your employer offers a 401(k), while you typically open and fund an IRA yourself (with help from a bank or broker). The contribution cap on a 401(k) plan is also much higher and you may be able to borrow money with a 401(k) loan.
Once you leave the company that sponsored your plan, however, you can no longer contribute.
Investors usually have more options with an IRA. Fidelity is a good choice for beginners, with fractional shares available for as little as $1. There are no account minimums or commissions on stocks and ETF trades and many zero-fee index funds.
If you want to be hands-off with your IRA, Betterment is one of our favorite robo-advisors, offering automated trading, rebalancing and dividend reinvesting. Customers can also sync outside accounts.
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FAQs
When can you withdraw from a 401(k)?
In most cases, you can make qualified withdrawals from your 401(k) after you turn 59½, whether you are retired or still working. (Taxes still apply.) Withdrawals before then are hit with a 10% penalty, except in some cases, mostly relating to financial hardship (medical expenses, to avoid eviction or foreclosure, etc.)
There is also the "rule of 55," which allows a worker age 55+ who has left their job (for any reason) to make withdrawals without paying the 10% penalty.
What's the average 401(k) employer match?
The average 401(k) employer match in 2025 was 4.7% of an employee's salary, according to data from Vanguard. The most common matching formula is a 50% match on the first 6% of salary contributed, resulting in a total match of 3% to 6%
Can you have both a 401(k) and an IRA?
Having both accounts is encouraged — it diversifies your portfolio, offers more long-term security and allows you to put more money into tax-advantaged accounts.
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