A 401(k) is an employer-sponsored retirement account that lets you invest part of each paycheck, often with tax advantages and an employer match.
How it works
With a traditional 401(k), contributions come out of your pay before income tax, lowering your taxable income now; you pay tax on withdrawals in retirement. Roth 401(k) contributions are after-tax, and qualified withdrawals are tax-free. For 2026 the employee deferral limit is $24,500, with higher limits for those age 50 and over.
Employer match and vesting
Many employers match a percentage of your contributions, for example 50% of the first 6% you contribute. That is an immediate return you should capture. Check your plan's vesting schedule, which determines when employer contributions become fully yours.
Investing inside the plan
Plans offer a menu of funds. A target-date fund is a one-decision option. Otherwise, build a diversified mix of low-cost index funds. Check expense ratios, since fees reduce returns. If you leave your job, you can leave the money, roll it into an IRA or a new employer plan.
Try the numbers
Use our 401(k) Calculator to see this in practice. With its default example (Current age: 30; Retirement age: 65; Annual salary: $85,000), it shows balance at retirement: $2,515,013. Adjust the inputs to match your situation.
Key takeaways
- Always contribute enough to get the full match.
- Traditional contributions reduce taxes now; Roth withdrawals are tax-free later.
- Choose low-cost diversified funds.
This article is for general education and is not personalized financial, tax or legal advice. Rules and limits change; confirm current figures with official sources such as IRS.gov, SSA.gov and StudentAid.gov, or consult a qualified professional. © 2026 FinanzCalc.