Understanding Your 401(k)
A 401(k) is an employer-sponsored retirement account that lets you save pre-tax money for retirement. Many employers also match a portion of your contributions — essentially free money.
The 401(k) is one of the most powerful wealth-building tools available. Understanding how to maximize it can add hundreds of thousands to your retirement.
2026 Contribution Limits
| Limit Type | 2026 Amount | Notes |
|---|---|---|
| Employee contribution | $24,000 | Your maximum annual contribution |
| Catch-up (age 50+) | +$7,500 | Additional allowed for those 50 and older |
| Total limit | $69,000 | Including employer contributions |
Super Saver?
The Employer Match
Many employers match a portion of your contributions. Common formulas:
| Match Type | Example | If You Earn $100K |
|---|---|---|
| 50% up to 6% | Employer puts in 50¢ for every $1 you contribute, up to 6% of salary | $3,000/year free |
| 100% up to 3% | Dollar-for-dollar match up to 3% | $3,000/year free |
| 100% up to 4% + 50% next 2% | Mix of full and partial match | $5,000/year free |
Don't Leave Free Money
Traditional vs Roth 401(k)
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Tax on contributions | Pre-tax (reduces current income) | After-tax (no deduction now) |
| Tax on growth | Tax-deferred | Tax-free |
| Tax on withdrawals | Taxed as income | Tax-free (after 59½) |
| Best if... | You expect lower tax rate in retirement | You expect higher rate in retirement |
Split the Difference
Investment Options
Inside your 401(k), you choose how to invest. Common options:
- Target Date Funds — All-in-one, adjusts automatically as you age
- Index Funds — Low-cost, tracks market (S&P 500, Total Market)
- Bond Funds — Lower risk, lower return
- Company Stock — Risky, don't over-concentrate
General advice: Choose low-cost index funds or a target date fund matching your retirement year. Keep fees under 0.5% if possible.
How Much Should You Contribute?
- Minimum: Enough to get full employer match (free money!)
- Better: 10-15% of income (including match)
- Best: Max out ($24,000 in 2026, or $31,500 if 50+)
- If you can't hit 10%, start with what you can and increase 1% per year
The 1% Rule
If retirement savings feel overwhelming, start with 1% and increase by 1% with each raise. You'll barely notice, but over time you'll reach 10-15%.
Vesting
Vesting determines when employer match money becomes "yours":
| Vesting Type | How It Works |
|---|---|
| Immediate | Match is yours right away |
| Cliff | 0% until X years, then 100% |
| Graded | Gradual increase (e.g., 20% per year for 5 years) |
Check Your Vesting Schedule
What Happens When You Leave?
- Rollover to new employer's 401(k) — Good if new plan is solid
- Rollover to IRA — Often better investment options, lower fees
- Leave it — OK if old plan is low-cost (but don't forget about it!)
- Cash out — AVOID! You'll pay taxes + 10% penalty (before 59½)
Frequently Asked Questions
Q: When can I access my 401(k) money?
A: Generally at age 59½ without penalty. Early withdrawals face income tax plus a 10% penalty (some exceptions apply like hardship, first home, medical expenses).
Q: Should I contribute more than the match?
A: Yes, if you can! After the match, consider: 401(k) vs IRA vs HSA. If your 401(k) has high fees, max an IRA first, then come back to 401(k).
Q: Is 401(k) better than IRA?
A: Both are great! 401(k) has higher limits ($24K vs $7.5K) and employer match. IRA has more investment choices. Ideally, use both.
Q: What if my employer doesn't offer a 401(k)?
A: Max out an IRA ($7,500 in 2026). If you're self-employed, look into Solo 401(k) or SEP-IRA.
Q: How do Required Minimum Distributions (RMDs) work?
A: Starting at age 73 (as of 2023 rules), you must withdraw a minimum amount each year from Traditional 401(k). Roth 401(k) also has RMDs (unlike Roth IRA).
Q: Can I borrow from my 401(k)?
A: Many plans allow loans, but it's risky. If you leave your job, the loan becomes due quickly. Only borrow as a last resort.
401(k) Optimization Checklist
- Contribute enough to get the full employer match
- Choose low-cost index funds or a target date fund
- Consider Traditional vs Roth based on tax situation
- Increase contributions by 1% with each raise
- Check vesting schedule if you might leave
- Don't cash out when changing jobs — roll over instead
- Review allocations once a year
This calculator provides projections based on assumed constant returns and contribution rates. Actual results will vary. This is educational content, not financial or tax advice. Consult a financial advisor for personalized guidance.