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A 401(k) is one of the best tools available to build wealth for retirement. If your employer offers one, contributing is almost always the right move — especially if they match part of what you put in.
This guide explains how a 401(k) works, how much you can contribute in 2026, and how to make the most of it.
Rates and figures as of May 2026.
401(k) Basics at a Glance
| Feature | Details (2026) |
|---|---|
| Contribution limit (under 50) | $23,500 |
| Catch-up contribution (50+) | $7,500 extra ($31,000 total) |
| Employer match | Varies; common is 3–6% of salary |
| Tax treatment (traditional 401k) | Pre-tax contributions; taxed on withdrawal |
| Tax treatment (Roth 401k) | After-tax contributions; tax-free withdrawals |
| Early withdrawal penalty | 10% + income tax (before age 59.5) |
| Required minimum distributions | Start at age 73 |
How a Traditional 401(k) Works
When you enroll in a 401(k), you choose a percentage of your paycheck to contribute. That money goes directly into the account before federal income taxes are calculated, reducing your taxable income for the year.
Your contributions are invested in the funds you select — usually a mix of mutual funds and target-date funds. The money grows tax-deferred, meaning you do not pay taxes on dividends, interest, or capital gains each year. You pay taxes only when you withdraw the money in retirement.
The Employer Match: Free Money
Many employers match a portion of what you contribute. A common structure is a 50% match on the first 6% of your salary. If you earn $60,000 and contribute 6% ($3,600), your employer adds another $1,800.
If your employer offers a match, contribute at least enough to get the full match. Not doing so is leaving part of your compensation on the table.
Traditional 401(k) vs Roth 401(k)
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Contributions | Pre-tax (reduces current taxable income) | After-tax (no current tax break) |
| Withdrawals in retirement | Taxed as ordinary income | Tax-free (if rules met) |
| Best for | High earners now who expect lower income in retirement | Younger earners expecting higher future tax rates |
| Income limits | None | None (unlike Roth IRA) |
Many employers now offer both options. Some people split contributions between the two to hedge against future tax rate changes.
What to Invest In
Most 401(k) plans offer a limited menu of funds. Here is a simple approach:
- Target-date fund: Pick the fund closest to your expected retirement year. It automatically adjusts its mix of stocks and bonds as you get older. Simple and hands-off.
- Index funds: Low-cost funds that track the S&P 500 or total stock market. Pair with a bond index fund based on your risk tolerance.
- Avoid high-fee actively managed funds. Look for expense ratios below 0.20%.
How Much Should You Contribute?
- Minimum: Enough to get the full employer match. This is always step one.
- Target: 15% of your gross income (including any employer match) is a common guideline.
- Maximum: $23,500 in 2026 (or $31,000 if 50 or older).
What Happens When You Change Jobs?
When you leave a job, you have three main options for your 401(k):
- Roll over to an IRA: Gives you more investment choices and lower fees. This is usually the best option.
- Roll over to your new employer’s 401(k): Keeps everything in one place.
- Leave it in your old plan: Fine if the plan has good low-cost funds. Check if there are any fees for former employees.
- Cash it out: Almost always a bad idea. You pay income tax plus a 10% penalty and lose years of compounding.
Frequently Asked Questions
See also: What Is a Brokerage Account? (And How to Open One)
See also: Saving vs. Investing: What’s the Difference and Which Should You Do?