401(k) for Beginners
A 401(k) is a workplace retirement plan that can allow employees to contribute part of their wages to an individual account. Some employers also make matching or other contributions.
What is a 401(k)?
A 401(k) is a qualified retirement plan that lets eligible employees make contributions through payroll. Traditional 401(k) contributions are generally made before federal income tax, while designated Roth contributions are generally included in taxable income when contributed.
Investment gains inside the plan generally receive tax-favored treatment under the applicable rules, with taxation depending on the type of contribution and distribution.
Traditional vs Roth 401(k)
| Traditional 401(k) | Roth 401(k) |
|---|---|
| Contributions are generally pre-tax for federal income-tax purposes. | Designated Roth contributions are generally made with after-tax dollars. |
| Tax is generally deferred until distribution. | Qualified Roth distributions can generally be tax-free under applicable rules. |
| Current tax treatment differs from Roth. | Current taxable income generally includes the Roth contribution. |
What is an employer match?
If a plan provides matching contributions, the employer may contribute additional money based on your contributions. The exact formula and vesting rules depend on the plan document.
Read your Summary Plan Description and plan materials to understand eligibility, matching rules, vesting and investment choices.
2026 contribution limit
For 2026, the IRS says the basic employee elective-deferral limit for 401(k) plans is $24,500. Additional catch-up contribution rules can apply to eligible participants. For 2026, the standard catch-up limit for many participants age 50 or older is $8,000, with a higher $11,250 catch-up limit for participants ages 60 through 63 under the applicable SECURE 2.0 rules.
These are annual IRS limits and can change. Your employer's plan can also impose its own restrictions.
How to approach a 401(k) decision
- Understand whether your employer offers a match.
- Read your plan's fees and investment options.
- Understand whether contributions are traditional, Roth or both.
- Choose a contribution amount that fits your cash flow and long-term plan.
- Review your contribution rate periodically as income changes.