401(k) plan
Also known as: 401k, 401(k) retirement plan, Defined contribution plan
A 401(k) is a US employer-sponsored, tax-advantaged retirement savings plan named after Section 401(k) of the Internal Revenue Code. Employees contribute pre-tax (or post-tax Roth) dollars from each paycheck up to an annual IRS limit. Employers may match contributions up to a defined percentage. Contributions and growth are tax-deferred until withdrawal in retirement.
401(k) is the dominant US private-sector retirement vehicle. It shifts retirement-savings responsibility from the employer (as under traditional pension plans) to the employee, with the employer typically contributing through matching. The plan's tax advantages are real: contributions reduce current-year taxable income, growth compounds tax-deferred, and withdrawals in retirement are taxed at (typically lower) retirement-era rates. Roth 401(k) variants flip the timing — pay tax now, withdraw tax-free in retirement.
How 401(k) contributions work
- Employee contributions — payroll-deducted, pre-tax for traditional 401(k), post-tax for Roth 401(k)
- 2026 limits: $23,500 employee elective deferral (per IRS, subject to annual adjustment); $7,500 catch-up for age 50+
- Employer match — common: 50% match on first 6% of employee contribution, or 100% match up to 3-4%
- Vesting schedule — employer match often vests over 2-6 years; employee contributions are always 100% vested
- Combined limit (employee + employer + after-tax) — $70,000 in 2026
Withdrawal rules
Withdrawals before age 59½ generally incur a 10% early-withdrawal penalty plus ordinary income tax. Exceptions: hardship withdrawals (limited circumstances), substantially equal periodic payments, separation from service after age 55, certain disability or medical circumstances. Required Minimum Distributions (RMDs) begin at age 73 (raised from 72 by SECURE 2.0 in 2023). 401(k) loans are permitted by most plans up to $50K or 50% of balance.
Common 401(k) plan features
- Auto-enrollment — new hires enrolled by default (typically at 3-6% contribution), can opt out
- Auto-escalation — annual increase in contribution rate (typically +1% per year up to a cap)
- Roth option — post-tax contributions with tax-free retirement withdrawal
- Investment menu — typically 15-25 mutual funds + target-date series
- Safe harbor — plan design that exempts from annual nondiscrimination testing in exchange for guaranteed employer contribution
Frequently asked questions
- What is a 401(k) plan?
- A US employer-sponsored, tax-advantaged retirement savings plan named after IRS code Section 401(k). Employees contribute pre-tax (or Roth post-tax) dollars from each paycheck; employers may match contributions. Tax-deferred growth until retirement withdrawal.
- How much can I contribute to a 401(k) in 2026?
- $23,500 employee elective deferral. Workers aged 50+ can add a $7,500 catch-up contribution. The combined employee + employer + after-tax limit is $70,000.
- What is a 401(k) employer match?
- An employer contribution tied to the employee's contribution rate. Common patterns: 50% match on the first 6% of employee contribution (so the employer pays up to 3% of salary), or 100% match up to 3-4%. Match dollars are often subject to a vesting schedule.
- When can I withdraw from my 401(k)?
- Without penalty: age 59½ or later, or under specific exceptions (hardship, disability, separation after 55). Before 59½, generally subject to a 10% penalty plus ordinary income tax. RMDs begin at age 73.