A 401(k) is the retirement plan most US employers offer: you choose a percentage of pay, the plan invests it before you see it, and the employer may add money of its own. Because the rules come partly from the IRS and partly from each plan document, two jobs that both offer a 401(k) can differ by thousands of dollars a year. This guide covers contributions, match formulas, vesting, the fund menu, Roth deferrals and the new catch-up rule, loans and withdrawals, and what to do when you leave. The stocks hub shows where a 401(k) fits beside IRAs, HSAs and taxable accounts.
How does a 401(k) work?
You elect a share of each paycheck, the employer deposits it in your account in the plan, and you invest it in funds the plan offers. Pre-tax deferrals are excluded from wages for federal income tax, though Social Security and Medicare taxes still apply; Roth deferrals are taxed now and can come out tax-free later. Either way, growth is not taxed until money leaves the plan.
The plan document sets the details within federal limits: who can join (a plan can make you wait up to a year of service and until age 21), the match formula, the vesting schedule, the fund lineup and whether loans are allowed. The summary plan description you get when you join lays these out.
Plans set up after December 29, 2022 must, for plan years starting after 2024, enroll eligible new employees automatically at a starting rate between 3% and 10% of pay, increased by one percentage point each year until it reaches at least 10% (and no more than 15%), unless the employee opts out. Employers with 10 or fewer employees, businesses under three years old, and church and government plans are exempt.
How much can you contribute to a 401(k) in 2026?
For 2026 you can defer $24,500, plus an $8,000 catch-up at 50 or older ($11,250 at ages 60 to 63), counting pre-tax and Roth deferrals together. The limit is per person, not per plan: after a mid-year job change, deferrals at both employers count toward one limit, and the second plan cannot see what the first took. An excess deferral must be paid back out by April 15 of the following year, or it is taxed twice.
A second, larger cap covers everything one employer's plans add for you: deferrals, match, profit-sharing and forfeitures, up to $72,000 in 2026 or 100% of pay if lower, with catch-ups on top. Only the first $360,000 of salary counts toward percentage-of-pay contributions, and highly compensated employees, generally those paid more than $160,000 the year before, may be cut back if the plan fails its nondiscrimination tests.
The age-based extras are laid out by birth year in IRA and 401(k) contribution limits. From 2027, low- and moderate-income savers can also earn a federal Saver's Match of 50% of up to $2,000 of contributions, so at most $1,000 per person a year, claimed on the tax return and paid into a plan or IRA that accepts it.
How does an employer 401(k) match work?
The employer adds money by a formula tied to what you defer, so the match is paid only on contributions you actually make. The table applies common formulas, including the safe harbor designs that let a plan skip some annual testing, to an $85,000 salary.
| Formula | Defer at least | Maximum match | Match on $85,000 |
|---|---|---|---|
| 50% of deferrals up to 6% of pay | 6% | 3% of pay | $2,550 |
| Dollar for dollar on the first 4% | 4% | 4% of pay | $3,400 |
| Basic safe harbor: 100% of the first 3%, plus 50% of the next 2% | 5% | 4% of pay | $3,400 |
| Automatic-enrollment safe harbor (QACA): 100% of the first 1%, plus 50% of the next 5% | 6% | 3.5% of pay | $2,975 |
| Nonelective safe harbor: 3% of pay to every eligible employee | Nothing | 3% of pay | $2,550 |
Worked example: Collecting the full basic safe harbor match on $85,000
Ana earns $85,000, and her plan uses the basic safe harbor formula.
- At 3%: she defers $2,550 and the employer matches all of it, another $2,550.
- At 5%: she defers $4,250. The employer matches 100% of the first 3% ($2,550) and 50% of the next 2% ($850), for $3,400.
- The extra 2% of pay costs her $1,700 of deferrals and brings $850 more of match, which vests at once under a safe harbor plan.
Timing matters too. Many plans work out the match each pay period, so racing to the annual limit early can cost money.
Worked example: Reaching the limit with eight paychecks left
Marco, 40, earns $180,000 in 26 checks of $6,923.08, and his plan matches deferrals dollar for dollar up to 4% of each check ($276.92). At 20% of pay he defers $1,384.62 a check and reaches $24,500 during his 18th paycheck.
- Match collected: 18 × $276.92 = $4,984.62.
- Match missed in the last 8 checks, when he defers nothing: $2,215.38.
- At 14% instead, his deferrals last into the final check and the match comes to $7,192.31, close to the full 4% of pay, $7,200.
A year-end true-up, if the plan has one, restores the missing match.
When is the employer match yours to keep?
Your own deferrals are always fully yours, but employer contributions can vest over time, and money not yet vested is forfeited when you leave. Federal law caps how slow vesting can be for matching contributions:
| Years of service | Three-year cliff | Six-year graded |
|---|---|---|
| Under 2 | 0% | 0% |
| 2 | 0% | 20% |
| 3 | 100% | 40% |
| 4 | 100% | 60% |
| 5 | 100% | 80% |
| 6 or more | 100% | 100% |
A year of service usually means a plan year in which you work at least 1,000 hours. Safe harbor matching and nonelective contributions must vest immediately, automatic-enrollment safe harbor contributions within two years, and everything vests at the plan's normal retirement age or if the plan ends.
Worked example: Leaving after four years with $12,000 of match
Jo has $12,000 of matching contributions in her account when she resigns after four years of service.
- Six-year graded schedule: 60% vested, so she keeps $7,200 and forfeits $4,800.
- Three-year cliff: 100% vested, so she keeps all $12,000.
- Leaving after two years under the same cliff: 0% vested, so the whole match is forfeited.
How do you choose investments in a 401(k)?
You pick from a menu chosen by the plan's fiduciaries, and if you pick nothing, contributions go to the plan's default investment, often a target-date fund. A typical lineup has a few stock and bond index funds, some active funds, a target-date series and a capital-preservation option such as a stable value or money market fund. Individual Treasury bills are rarely offered, though money rolled into an IRA can hold them, as T-bills in an IRA explains.
Department of Labor rules allow four kinds of default investment: a target-date fund, a balanced fund, a managed account or, for the first 120 days only, a capital-preservation fund. Target-date funds move from stocks toward bonds as their date approaches; target-date funds compares glide paths, and the asset-weighted average expense ratio of target-date mutual funds was 0.27% in 2025. Stable value funds covers the usual cash option, and asset allocation by age how much to hold in stocks.
Worked example: What 1 percentage point of fees does over 35 years
The Department of Labor's own illustration starts with a $25,000 balance, no further contributions and a 7% return before fees for 35 years.
- Fees of 0.5% a year: the account grows to about $227,000.
- Fees of 1.5% a year: it grows to only about $163,000.
- The 1-point difference cuts the ending balance by 28%.
Should you make Roth 401(k) contributions?
If your plan offers Roth deferrals, the trade-off is the same as for IRAs: Roth pays tax now for tax-free qualified withdrawals, while pre-tax defers it. The break-even tax rate is worked out in Roth vs traditional IRA. Three features are specific to plans:
- No income limit. High earners who cannot use a Roth IRA can still make Roth deferrals.
- No lifetime RMDs. Since 2024, designated Roth accounts in plans have no required minimum distributions while the owner is alive.
- A clock per plan. The five-year period for qualified withdrawals starts with the first year you made Roth deferrals to that plan.
Matches normally go in pre-tax even when you defer as Roth, though SECURE 2.0 lets a plan offer vested employer contributions as Roth, taxable in the year they are deposited.
A new rule for higher earners took effect in 2026. It covers anyone who earned more than $150,000 in prior-year wages from the employer sponsoring the plan; for 2026 that means 2025 Social Security wages, shown in box 3 of the W-2. Their catch-up contributions must go in as Roth, and if the plan has no Roth option they cannot make catch-ups at all. Final regulations apply from 2027, and for 2026 plans may follow a reasonable, good-faith reading of the law. SEP and SIMPLE IRAs are not covered.
Worked example: A $175,000 earner turning 52 in 2026
Kim's 2025 W-2 from her employer shows $175,000 of Social Security wages, and she turns 52 in 2026.
- Regular deferrals: up to $24,500, pre-tax or Roth as she chooses.
- Catch-up: up to $8,000, which must be Roth, so it adds nothing to her deduction.
- In the 24% bracket, putting the $24,500 in pre-tax and the $8,000 as Roth cuts her 2026 federal tax by $5,880, against $7,800 if all $32,500 could have gone in pre-tax.
Can you borrow or withdraw from a 401(k) while still working?
Only if the plan allows it: many plans offer loans and hardship withdrawals, but both carry costs that can follow you after you leave. A loan can be up to half your vested balance or $50,000, whichever is less, and a plan may allow up to $10,000 even when that is more than half. It must be repaid within five years, or longer for a home purchase, in payments at least quarterly, usually through payroll. Interest goes back into your own account, but the borrowed money is out of the market until repaid, and missed payments turn the balance into a taxable distribution, with the 10% additional tax before 59½.
Worked example: A $30,000 loan, then a job change
Rosa, 45, has a $60,000 vested balance, so she can borrow $30,000. At a plan rate of 8% over five years, payroll takes $608.29 a month. Two years later she leaves her job with $20,000 still owed, and the plan offsets the loan against her account.
- If she deposits $20,000 into an IRA or her new plan by her tax-filing deadline, including extensions, nothing is taxed.
- If she cannot, the $20,000 is income: $4,400 at a 22% rate plus a $2,000 additional tax, $6,400 in all.
A hardship withdrawal needs an immediate and heavy financial need, such as medical bills, buying a main home, tuition, preventing eviction or foreclosure, funeral costs or repairs after a casualty. It is taxable, usually owes the 10% additional tax before 59½ and, unlike a loan, can never be repaid or rolled over. SECURE 2.0 added smaller options a plan may offer: an emergency withdrawal capped at $1,000 a year, and up to $10,500 in 2026 for victims of domestic abuse, both free of the 10% tax. A cash cushion outside the plan, covered in where to keep an emergency fund, avoids most of these costs.
What happens to your 401(k) when you change jobs?
You can leave it in the old plan, move it to your new plan, roll it into an IRA or cash it out; only cashing out triggers tax.
| Option | Tax now | Points to weigh |
|---|---|---|
| Leave it in the old plan | None | Allowed above the plan's small-balance cutoff; you keep its menu and fees |
| Roll into the new employer's plan | None, by direct rollover | One account to manage, possible future loans, and pre-tax money kept out of backdoor Roth math |
| Roll into an IRA | None, by direct rollover | The widest investment choice, but plan-only features such as loans and the age-55 exception are lost |
| Cash out | Income tax, plus 10% before 59½ in most cases | The plan withholds 20% for federal tax, and the sheltered space is gone |
A direct rollover sends the money from plan to plan or plan to IRA with no withholding. If the plan pays you instead, it must withhold 20%, and you have 60 days to deposit the full amount, making up the withheld part from your own pocket.
Worked example: The 20% gap in a 60-day rollover
Ben, 38, takes his $40,000 balance as a check.
- Withheld: 20% × $40,000 = $8,000, so the check is $32,000.
- To roll over all $40,000 within 60 days, he adds $8,000 of his own cash; the withheld $8,000 comes back as a credit when he files.
- If he deposits only the $32,000, the missing $8,000 is a taxable distribution, plus an $800 additional tax.
Two plan rules matter when choosing. If you separate from the employer in the calendar year you reach 55 or later, or 50 for some public safety workers, withdrawals from that employer's plan skip the 10% additional tax, an exception lost once the money is in an IRA. And the plan can act on small balances without your consent, paying out $1,000 or less in cash and moving somewhat larger amounts into an IRA in your name.
What are the main risks of relying on a 401(k)?
The biggest risks are the investments themselves and money leaking out early, but plan rules and fees also cut into what you end up with.
- Market risk. Stock funds can fall sharply, and a target-date fund near its date still holds stocks; investing every payday spreads purchases out but does not prevent losses.
- Fees and a fixed menu. You can use only the plan's funds, so check expense ratios and charges on each quarterly statement.
- Company stock. A large holding ties your savings to the company that pays your salary.
- Forfeiture. Leaving before you vest hands back unvested match.
- Leakage. Defaulted loans, hardship withdrawals and cash-outs are taxed, often penalized, and lose years of sheltered growth.
- RMDs and rule changes. Pre-tax balances face required minimum distributions once you reach 73 (75 for those born after 1959), though a plan may let employees who still work there and own under 5% of the company wait until they retire.
To see what a higher deferral rate could grow to, try the compound interest calculator; HSA investing covers the account many people fund once the match is secured. Tax rules change and plan documents differ, so read your summary plan description and consider a tax professional before a large rollover, Roth conversion or hardship withdrawal.