What is a 401(k) and how does it work?
What a 401(k) plan is, how contributions and employer matches work, traditional vs. Roth 401(k), 2026 contribution limits and early withdrawal rules.
Quick answer
A 401(k) is a workplace retirement savings plan: you set aside a percentage of your pay before you receive it, and many employers add money (a match). For 2026, the IRS lets employees contribute up to $24,500; people 50 and older can add $8,000, and people 60 to 63 can add up to $11,250 instead.
Key takeaways
- It is an employer retirement plan: contributions come out of your paycheck.
- 2026 employee contribution limit: $24,500 (plus catch-up contributions from age 50).
- An employer match is extra money: contribute at least enough to get it all, if you can.
- Withdrawing before age 59½ usually means taxes plus an additional penalty.
A 401(k) is the most common way to save for retirement through work in the United States. If your employer offers one, understanding how it works can mean thousands of extra dollars at retirement.
How it works
- You choose a percentage of your pay to contribute.
- That money is taken out of your paycheck automatically and goes into your account.
- You choose investments from the plan’s options (for example, target-date funds).
- Your money grows over time thanks to compound interest and tax advantages.
The employer match
Many employers add money when you contribute. A common formula is “50% of your contribution up to 6% of your salary.” On a $50,000 salary:
| Your contribution | Employer contribution (50% up to 6%) |
|---|---|
| 3% = $1,500 | $750 |
| 6% = $3,000 | $1,500 |
| 10% = $5,000 | $1,500 (cap) |
If you contribute less than the cap, you leave money on the table. Also check vesting: how long you must work for the employer’s contributions to be fully yours.
2026 limits
| Item | 2026 limit (IRS) |
|---|---|
| Employee contribution | $24,500 |
| Catch-up from age 50 | $8,000 |
| Catch-up at ages 60 to 63 (instead of the above) | $11,250 |
Traditional vs. Roth 401(k)
- Traditional: you contribute before taxes (lower taxes today) and pay taxes when you withdraw in retirement.
- Roth 401(k): you contribute after taxes and, if you meet the requirements, retirement withdrawals are tax-free.
Not every plan offers a Roth option. Compare with IRAs in traditional IRA vs. Roth IRA.
Early withdrawals
A 401(k) is meant for retirement. Taking money out before age 59½ generally means income tax plus a 10% additional tax, with some exceptions. That is why it helps to keep a separate emergency fund.
Run your projection
Try your salary, contribution and employer match in the 401(k) calculator. Change the assumed return to see conservative and optimistic scenarios.
General information, not investment or tax advice. Figures are IRS limits for 2026 and change every year.
Frequently asked questions
What is a 401(k) in simple terms?
It is a retirement savings account offered by your job. Part of your pay goes straight into the account, is invested and grows over time with tax advantages.
How much can I contribute to a 401(k) in 2026?
Up to $24,500 as an employee. If you are 50 or older you can add $8,000; if you are 60 to 63, the catch-up can be up to $11,250 instead, if your plan allows it.
What is an employer match?
It is money your employer adds when you contribute, based on the plan's formula, for example 50% of your contribution up to 6% of your salary. Also check the vesting schedule.
Can I take money out of my 401(k) before retirement?
Some plans allow loans or hardship withdrawals, but withdrawing before age 59½ generally means paying income tax plus a 10% additional tax, with some exceptions. Check your plan's rules.
What happens to my 401(k) if I change jobs?
The money you contributed is yours. You can leave it in the old plan if allowed, move it to your new employer's plan or roll it over to an IRA.
Sources
- 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500 Internal Revenue Service
- 401(k) plans Internal Revenue Service
This article is general and educational; it is not personalized financial, legal or tax advice. Financial product terms change: always confirm current terms with the institution.