401(k)

A 401(k) is a retirement savings account offered by many employers that lets workers set aside a portion of their paycheck before taxes are taken out. The money grows tax-deferred, meaning you do not pay taxes on it until you withdraw the funds in retirement. Because contributions come out of your paycheck automatically, a 401(k) makes it easier to build savings over time without having to think about it.

In 2026, employees can contribute up to $23,500 per year to a traditional 401(k). Workers aged 50 and older can make additional “catch-up” contributions of up to $7,500, bringing their total annual limit to $31,000. Workers aged 60 to 63 have an even higher catch-up limit of $11,250 under rules introduced by the SECURE 2.0 Act.

Many employers also offer a matching contribution, which means the company adds money to your account based on what you contribute. For example, an employer might match 50 cents for every dollar you put in, up to 6% of your salary. This match is essentially extra compensation added to your retirement savings.

There are two main types of 401(k) accounts:

• Traditional 401(k): Contributions are made with pre-tax dollars, reducing your taxable income today. Withdrawals in retirement are taxed as ordinary income.
• Roth 401(k): Contributions are made with after-tax dollars, so there is no immediate tax break. However, qualified withdrawals in retirement are tax-free.

Withdrawals before age 59 and a half are generally subject to a 10% early withdrawal penalty, plus ordinary income taxes. Once you reach age 73, the IRS requires you to start taking required minimum distributions (RMDs) from a traditional 401(k) each year.

Practical example: If you earn $60,000 per year and contribute 6% of your salary, that is $3,600 going into your 401(k) annually. If your employer matches 50% of that, they add another $1,800, giving you $5,400 in total contributions for the year without changing your spending habits dramatically.

RetireGrader is not a financial advisor or fiduciary. This definition is for educational purposes only.