Making the most of your 401(k) plan starts with differentiating between 401(k) types, choosing a contribution limit and selecting investments to help your account grow.
What is a 401(k) plan?
A 401(k) plan is an employer-sponsored account that allows employees to contribute a portion of their paycheck to save for retirement. Oftentimes, employers may match part of these contributions, but it is not required.
There are two main types of 401(k) plans: traditional and Roth. The traditional 401(k) is funded with pretax money, while the Roth 401(k) takes after-tax contributions. The type of plan you have determines what tax advantages you can receive, either now or during retirement.
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AD Advertisement How does a 401(k) work?
Here’s a step-by-step process of how a 401(k) works:
- Employee contributions. Employees choose a percentage of their paycheck to go into their 401(k) account. It’s deducted automatically and deposited directly into their 401(k) account.
- Employer match. Many employers offer to match a percentage of these contributions. This free money can provide an extra boost of retirement savings.
- Investment selections. Options within a 401(k) plan can include stocks, bonds and mutual funds, but depend on your plan provider. A common investment option is target-date funds, which automatically adjust their investment mix from aggressive to conservative over time as the account owner approaches retirement age. Read more on how to invest your 401(k).
- Vesting schedule. While an employee’s contributions are always theirs, their employer’s match may be subject to a vesting schedule. This means the employee might not fully own the employer contributions until after a set period of time.
Starting 2025, employees are automatically enrolled in 401(k) and 403(b) plans by their employers once eligible. This rule doesn't apply to plans beginning before December 29, 2022. If your plan was started before this date, you'll need to opt-in manually. The contribution rate will increase annually until it reaches a maximum of 15%. This is a change ushered in by the Secure 2.0 Act, which aims to help workers save for retirement.
Types of 401(k) plans
The two main types of 401(k) plans — Roth and traditional — are differentiated by their tax advantages.
| Roth 401(k) | Traditional 401(k) | |
|---|---|---|
| Contribution limits | The 401(k) contribution limit applies to both accounts. You can contribute to both accounts in the same year, as long as you keep your total contributions under the cap. You can contribute $24,500 in 2026. People aged 50 and older can contribute an extra $8,000 as a catch-up contribution. Due to the Secure 2.0 Act, those aged 60, 61, 62 and 63 get a higher catch-up contribution of $11,250. | |
| Tax treatment of contributions | Contributions are made after taxes, with no effect on current adjusted gross income. Employer matching dollars must go into a pretax account and are taxed when distributed. | Contributions are made pretax, which reduces your current adjusted gross income. |
| Tax treatment of withdrawals | No taxes on qualified distributions in retirement. | Distributions in retirement are taxed as ordinary income. |
| Withdrawal rules | Withdrawals of contributions and earnings are not taxed as long as the distribution is considered qualified by the IRS: The account has been held for five years or more and the distribution is:
Unlike a Roth IRA, you cannot withdraw contributions any time you choose. | Withdrawals of contributions and earnings are taxed. Distributions may be penalized if taken before age 59 ½, unless you meet one of the IRS exceptions. |
» Dive deeper: Our full explainer on traditional vs. Roth 401(k) plans
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How much can I contribute to my 401(k)?
Every year, the IRS announces new contribution limits for retirement plans, including 401(k)s. In 2026, the 401(k) contribution limit for employees is $24,500 in 2026. People aged 50 and older can contribute an extra $8,000 as a catch-up contribution. Due to the Secure 2.0 Act, those aged 60, 61, 62 and 63 get a higher catch-up contribution of $11,250.
The total contribution limit in 2026, which includes both employee and employer contributions, is $72,000 or 100% of employee compensation, whichever is less. That combined limit is $80,000 for those age 50 and older, and $83,250 for those age 60 to 63.
A 401(k) plan offers higher annual contribution limits than individual retirement accounts (IRAs). An IRA tops out at $7,500 for 2026 ($8,600 if aged 50 and older).
Many financial professionals say you should aim to contribute 10% to 15% of your income to retirement savings. According to Fidelity Investments, the average 401(k) contribution rate was 14.2% in the third quarter of 2025, and that includes employer and employee contributions.
If 10% to 15% of your salary feels too steep, it's fine to contribute what you can and work your way up as you can afford to. You aren’t required to contribute the maximum, but it’s a good rule of thumb to consider contributing enough to get your employer match if one is offered.
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How to make after-tax 401(k) contributions
If your plan allows after-tax 401(k) contributions, you can contribute beyond the 401(k) employee limit and towards the overall combined contribution limit. After-tax contributions don’t reduce your taxable income, but they can be withdrawn tax-free up to the amount contributed.
Earnings on those contributions grow tax-deferred and are taxed when withdrawn unless they’re rolled into a Roth account, a strategy sometimes referred to as a mega backdoor Roth. Not all plans offer after-tax contributions or in-service rollovers, so you’ll need to check your plan’s rules.
What are the 401(k) withdrawal rules?
To make a qualifying withdrawal from a traditional 401(k), you must be at least 59 ½, have a qualifying disability or qualify for a hardship withdrawal. If you don't meet these requirements, you may face a 10% early withdrawal penalty, plus you'll have to include your withdrawal as part of your income when you file your taxes.
You can withdraw emergency expenses of up to $1,000 per year without paying the 10% penalty. If the money isn't repaid within three years, no additional emergency distributions are allowed over those three years.
Still, in most cases, an early 401(k) withdrawal will trigger taxes and leave less money in the account to invest over time.
What are required minimum distributions?
Once you reach age 73, taking withdrawals from your traditional 401(k) stops being a choice. Required minimum distributions are the amounts you must take out of your 401(k) each year unless you're still working and choose to defer until retirement.
- You are allowed to withdraw more than the minimum, and the distributions are part of your taxable income for the year.
- If you have a Roth 401(k), there are no required minimum distributions.
What happens to your 401(k) if you quit your job
If you leave your job, you can take your 401(k) money with you. You can roll the money into your new employer’s 401(k) plan or into an IRA.
- Rollovers completed within 60 days usually are not taxable.
- You also could leave it in your old employer’s plan, but you can’t keep contributing to it.
Can I lose money in a 401(k)?
Yes, you can lose money in a 401(k) plan. Because the money is invested, there is always a risk of loss based on economic changes, financial market movements or other factors.
How long does it take for my 401(k) to vest?
That depends on your plan's rules. Your contributions are always yours. Your employer’s contributions, on the other hand, may vest immediately or on a fixed schedule. The best way to find out is to check with your human resources team or directly with your employer plan provider.
What is a solo 401(k)?
A solo 401(k) is a retirement account for business owners who have no employees. The plan can only cover the business owner and their spouse, if they have one. A solo 401(k), which the IRS calls a one-participant 401(k) plan, has many of the same features of a traditional 401(k) plan.
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- 1. Senate.gov. SECURE 2.0 Act of 2022. Accessed Feb 12, 2026.
- 2. Fidelity Investments. Q3 2025 Retirement Analysis. Accessed Feb 12, 2026.
- 3. Internal Revenue Service. 401(k) Resource Guide - Plan Participants - General Distribution Rules. Accessed Feb 12, 2026.
- 1. Senate.gov. SECURE 2.0 Act of 2022. Accessed Feb 12, 2026.
- 5. Internal Revenue Service. Retirement plan and IRA Required Minimum Distributions FAQs. Accessed Feb 12, 2026.
- 6. Internal Revenue Service. 401(k) Resource Guide - Plan Sponsors - General Distribution Rules. Accessed Feb 12, 2026.
