Quick answer
A 401(k) is a US employer-sponsored retirement plan: you choose to have part of your pay put into an investment account, either before tax (traditional) or after tax (Roth). Some employers add a match. For 2026, the IRS employee contribution limit is $24,500 [1].
Key points
- A 401(k) is a US workplace plan; contributions come straight out of your paycheck.
- Traditional contributions are tax-deferred; Roth contributions are taxed now and qualified withdrawals are generally tax-free.
- An employer match is optional for the employer and follows the plan's own formula.
- Your own contributions are always 100% yours; employer money may vest over several years.
- The 2026 employee limit is $24,500, with extra catch-up room from age 50.
#What is a 401(k), in plain terms?
A 401(k) is a retirement account that exists only through an employer in the United States. The IRS describes it as a plan that lets an employee elect to have the employer contribute a portion of the employee's wages to an individual account under the plan [2]. Those contributions are called elective deferrals — you elect to defer part of your pay into the plan instead of receiving it as cash today.
Investor.gov, the SEC's education site, puts it simply: a 401(k) is "an employer-sponsored retirement plan that gives employees a choice of investment options" [3]. The plan offers a menu — often stock funds, bond funds and target-date funds — and you decide how your account is split among them. The account's value then rises and falls with those investments; a 401(k) is a container, not an investment with a fixed return.
How money moves through a 401(k)
#How are traditional and Roth 401(k) contributions taxed?
Most plans offer a traditional (pre-tax) option, and many also offer a Roth option. With traditional contributions, the IRS explains that elective deferrals are not subject to federal income tax withholding when they are deferred and are not reported as taxable income on your return for that year [2]. Investor.gov adds that contributions and investment earnings are tax-deferred — you pay income tax later, when you withdraw [3].
Roth 401(k) contributions work the other way round. Investor.gov notes they "are made with after-tax dollars" and that withdrawals "are generally tax-free" [3]; the IRS says Roth elective deferrals are generally taxed under the rules that apply to Roth IRAs [2]. The same pay-now-or-pay-later trade-off is explained with numbers in Traditional vs Roth IRA.
#How does an employer match work?
A match is extra money your employer puts into your account based on what you contribute. It is not required: Investor.gov notes that some employers "will match a portion of an employee's 401(k) contributions" [3]. The formula is set by each plan. The IRS gives one example — an employer contributing 50 cents for each dollar an employee defers [2]. A formula can also cap the match at a percentage of salary; in that case, contributing above the cap adds your own money but no extra match.
Worked example
Worked example: a 50% match up to 6% of pay
Hypothetical plan: the employer matches 50 cents per dollar you contribute, on contributions up to 6% of salary. Your salary is $60,000 a year. Calculated with Python; before investment gains or losses.
- You contribute 3% (0.03 × $60,000)
- $1,800 you + $900 match = $2,700
- You contribute 6% (0.06 × $60,000)
- $3,600 you + $1,800 match = $5,400
- You contribute 10% (0.10 × $60,000)
- $6,000 you + $1,800 match = $7,800
- Match at 10% (capped at 0.5 × 6% × $60,000)
- $1,800 — the same as at 6%
In this plan, the match grows with your contributions only up to 6% of pay. Above that, extra contributions are all your own money.
The formula is invented for illustration. Your plan's summary plan description states the real formula, which may differ or may not include a match at all.
#What does vesting mean, and when is the match really yours?
Vesting means ownership. The IRS defines it as the share of your account that you own, which can grow each year you work for the employer [4]. One rule is simple: your own contributions taken from your salary "are always 100% vested, or owned, by the employee" [4]. Employer contributions, including a match, can follow a vesting schedule. If you leave before you are fully vested, the unvested part of the employer's money can be forfeited.
Qualified defined contribution plans such as 401(k)s can use different vesting schedules set by the plan document — from immediate vesting, to cliff vesting where you go from 0% to 100% after 3 years of service, to graded vesting where your share rises each year [4]. The IRS example of a graded schedule rises by 20 percentage points a year from year 2 to 100% at year 6 [4]. Whatever the schedule, all employees must be 100% vested on reaching the plan's normal retirement age or if the plan is terminated [4].
| Years of service | Cliff vesting | Graded vesting |
|---|---|---|
| 1 | 0% | 0% |
| 2 | 0% | 20% |
| 3 | 100% | 40% |
| 4 | 100% | 60% |
| 5 | 100% | 80% |
| 6 | 100% | 100% |
Graded vesting: share of employer match you own
#How much can you contribute in 2025 and 2026?
The IRS adjusts the limits for inflation. For tax year 2026, it announced that the amount individuals can contribute to their 401(k) plans increased to $24,500, up from $23,500 for 2025 [1]. People aged 50 and over can add catch-up contributions, and under the SECURE 2.0 Act a higher catch-up applies to people aged 60, 61, 62 and 63 [1]. A separate, larger cap limits the total that you and your employer together can add to your account in a year [5].
These are federal maximums. Your plan can set its own rules on top, such as how soon new employees can join. Because the numbers change, check the IRS limits page for the tax year you are contributing in.
#What happens if you take money out early?
A 401(k) is built for retirement, and early access is discouraged. The IRS says that withdrawals from an IRA or retirement plan before age 59½ are generally called early distributions, and "Individuals must pay an additional 10% early withdrawal tax unless an exception applies" [6]. That 10% is on top of any regular income tax owed. For employer plans, exceptions include leaving your job during or after the year you reach age 55, death, total and permanent disability, and certain unreimbursed medical expenses [6].
Later in life the rule reverses: for traditional (pre-tax) money, the law eventually requires minimum withdrawals each year. See required minimum distributions for the ages and the calculation.
#Who oversees a 401(k) plan?
Investor.gov points out that "The SEC does not regulate or oversee retirement plans such as 401(k) plans" and directs plan questions to the US Department of Labor's Employee Benefits Security Administration [3]. The funds inside a plan still charge fees, which reduce your returns over time — see expense ratios and fund fees and the glossary entry for expense ratio.
Common beginner mistakes
Contributing less than the match formula needs
If your plan matches up to a set percentage of pay, contributing below it leaves employer money unclaimed. Read the formula in your plan documents before choosing a rate.
Assuming the match is yours on day one
Employer contributions may follow a vesting schedule. Check your vested balance before changing jobs, not after.
Using an old year's limit
Limits change most years. Quoting the 2025 figure in 2026 can mean contributing less than allowed — or, through two jobs, more than allowed.
Treating a 401(k) as an emergency fund
Early withdrawals can trigger income tax plus an additional 10% tax. Short-term cash usually belongs in an emergency fund.
What's the bottom line?
A 401(k) is a US workplace account that moves part of your pay into investments before you see it, with tax paid either now (Roth) or later (traditional). An employer match can add to your savings, but it follows the plan's formula and may vest over years. For 2026 the employee limit is $24,500, so check the IRS figures each year. Next, compare the two tax treatments in Traditional vs Roth IRA.
Frequently asked questions
Is a 401(k) only available in the United States?
Yes. It is a US plan created under US tax law and offered by US employers. Other countries have their own workplace pension systems with different rules.
Do I lose my 401(k) if I change jobs?
No. Your own contributions are always 100% vested. Vested employer money is also yours. Only the unvested part of employer contributions can be forfeited when you leave.
Can I have a 401(k) and an IRA at the same time?
Yes, they are separate accounts with separate limits. Having a workplace plan can affect whether traditional IRA contributions are tax-deductible, depending on income.
Does every employer offer a match?
No. A match is optional, and the formula varies from plan to plan. Your summary plan description explains whether there is one and how it is calculated.
Sources
Grade A = primary source (regulator, government agency, official rulebook or the index provider's own documents). Numbers in brackets in the text point here.
- Internal Revenue Service. 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500 (IR-2025-111) (2025). Accessed 2026-10-03.A
- Internal Revenue Service. 401(k) plan overview (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. 401(k) Plans (2026). Accessed 2026-10-03.A
- Internal Revenue Service. Retirement topics - Vesting (2026). Accessed 2026-10-03.A
- Internal Revenue Service. COLA increases for dollar limitations on benefits and contributions (2026). Accessed 2026-10-03.A
- Internal Revenue Service. Retirement topics - Exceptions to tax on early distributions (2026). Accessed 2026-10-03.A
This page is general education, not personal financial, tax or legal advice. Figures in worked examples are hypothetical and calculated before taxes and fees unless stated. Rules and limits change; check the linked primary sources for the current version. How we check every page.
