What Is a 401(k)?
A 401(k) is an employer-sponsored retirement savings plan that lets you contribute a portion of your paycheck before taxes are taken out. Many employers also match a percentage of your contributions — essentially giving you free money.
2026 Contribution Limits
| Category | 2026 Limit |
|---|---|
| Employee contribution (under 50) | $23,500 |
| Catch-up contribution (50+) | $7,500 additional |
| Total limit (employee + employer) | $70,000 |
Understanding Employer Matching
The employer match is the most powerful feature of a 401(k). Common matching formulas include:
- Dollar-for-dollar up to 3%: Employer matches 100% of your contribution up to 3% of salary
- 50 cents on the dollar up to 6%: Employer matches 50% of your contribution up to 6% of salary
- Tiered matching: Different match rates at different contribution levels
Example: 50% Match Up to 6%
If you earn $80,000 and contribute 6% ($4,800):
- Your contribution: $4,800
- Employer match (50%): $2,400
- Total annual retirement savings: $7,200
- That $2,400 match is a 50% instant return on your money
Not contributing enough to get the full match is leaving free money on the table.
Traditional 401(k) vs. Roth 401(k)
Many employers now offer both options:
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Tax on contributions | Pre-tax (reduces current income) | After-tax (no current deduction) |
| Tax on withdrawals | Taxed as ordinary income | Tax-free |
| Best if you expect | Lower tax rate in retirement | Higher tax rate in retirement |
| RMDs at 73? | Yes | Yes (but can roll to Roth IRA) |
General rule: If you are early in your career and in a lower tax bracket, the Roth 401(k) is often the better choice. If you are in your peak earning years, the traditional 401(k) provides more immediate tax savings.
Choosing Your Investments
Most 401(k) plans offer a menu of mutual funds. Here is a simple strategy:
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Target-date fund: A single fund that automatically adjusts its allocation as you approach retirement. Choose the fund closest to your expected retirement year.
-
Three-fund portfolio: If you prefer more control, split between a U.S. stock index fund, an international stock index fund, and a bond index fund.
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Avoid company stock: Do not put more than 5-10% in your employer's stock. Your job already depends on the company — do not let your retirement depend on it too.
Strategies to Maximize Your 401(k)
1. Always Get the Full Match
This is the minimum. Contribute at least enough to capture every dollar of employer matching.
2. Increase Contributions by 1% Each Year
Most people cannot jump from 6% to 15% overnight. Instead, increase by 1% each year — you will barely notice the difference in your paycheck.
3. Choose Low-Cost Index Funds
Look for funds with expense ratios below 0.20%. Over a 30-year career, the difference between a 0.10% and 1.00% expense ratio on a $500,000 portfolio is over $100,000.
4. Do Not Cash Out When Changing Jobs
Roll your 401(k) into an IRA or your new employer's plan. Cashing out triggers income taxes plus a 10% early withdrawal penalty if you are under 59½.
Key Takeaways
- Always contribute enough to get the full employer match — it is free money
- Consider a Roth 401(k) if you are early in your career
- Choose low-cost index funds or a target-date fund
- Increase contributions by 1% each year until you reach the maximum
- Never cash out your 401(k) when changing jobs — roll it over instead