A 401(k) is a retirement plan your employer offers that takes a slice of each paycheck — before tax, after tax, or both, depending on the type you pick — and invests it in funds you choose from the plan’s menu, often with extra money added by your employer as a match. For 2026, you can put in up to $24,500 of your own pay, plus $8,000 more if you are 50 or older, or $11,250 more at ages 60 to 63. The trade is lock-in: take money out before age 59½ and you normally pay income tax plus a 10% penalty, and from your early 70s the IRS makes you start taking money out whether you need it or not.
The name is not a brand. It is a section number. As the IRS puts it, a 401(k) is a feature of a qualified profit-sharing plan that lets employees contribute part of their wages to individual accounts — the feature authorised by section 401(k) of the Internal Revenue Code, added by the Revenue Act of 1978. That is why the limits, tax treatment and withdrawal rules below are tax law, not bank policy: the same at every employer, though funds and match formulas differ.
How does a 401(k) work?
You enrol, choose a percentage or a flat amount of pay, and that amount leaves every paycheck automatically. Your employer sends it to the plan, where it is invested in the options you pick — most plans offer a short menu of mutual funds, often including a target-date fund that shifts toward safer assets as a retirement year approaches. If you pick nothing, the money goes into the plan’s default option, which is worth checking rather than assuming.
Three features do most of the work:
- The tax break. Traditional contributions are excluded from your taxable income for the year, so a $10,000 contribution on a $100,000 salary leaves $90,000 taxed — lowering figures like your adjusted gross income. Roth contributions get no break now and are taxed later instead.
- The employer match. Many employers add money when you contribute — a common shape is 50 cents for every dollar you put in, up to a set percentage of pay. On a $60,000 salary, contributing 6% ($3,600) under that formula brings a $1,800 match. Contribute less than the full matched percentage and the unmatched part is pay you agreed to leave behind.
- Compounding inside the account. Earnings are not taxed year by year while they stay in the plan, so the full gain keeps working — the same compound interest effect as anywhere else, without an annual tax drag.
Your own contributions are always 100% yours. Vesting — ownership on a schedule — matters for the employer’s money, next.
Traditional 401(k) vs Roth 401(k): when is the tax paid?
Almost every plan decision reduces to this one. The two types share the same combined limit — your $24,500 for 2026 covers traditional and Roth contributions together, not $24,500 each.
| Traditional 401(k) | Roth 401(k) | |
|---|---|---|
| Money goes in | Before tax — lowers this year’s taxable income | After tax — no break this year |
| Growth | Not taxed while in the plan | Not taxed while in the plan |
| Money comes out | Taxed as ordinary income | Tax-free if the distribution is qualified |
| Employer match | Goes in pre-tax, and is taxed when you take it out | Same — the match itself is pre-tax money even when your own contributions are Roth |
| Required withdrawals | Yes, from age 73 (75 if born in 1960 or later) | No required withdrawals during your lifetime since 2024 |
A qualified Roth distribution needs two things: the account open for at least five tax years, and you 59½ or older, disabled, or receiving the money as a beneficiary. Take Roth earnings out before both are met and the earnings are taxed, and may face the 10% penalty as well.
Which type wins depends on a guess about tax rates — yours now against yours in retirement. A high earner expecting a lower rate later usually leans traditional; a younger worker in a low bracket often leans Roth. Plenty of people split contributions rather than betting on one guess. What does not change is the match: grab it in full first, whichever side you use.
One 2026 change catches higher earners: under SECURE 2.0, if your wages from the sponsoring employer were over $150,000 in the previous year, catch-up contributions must go in as Roth — after-tax — even if the rest of your money is traditional.
What are the 401(k) contribution limits for 2026?
These are the IRS figures for 2026, from the IRS contribution limits page. Articles still quoting $23,500 are describing 2025.
| Limit (2026) | Amount |
|---|---|
| Your own contributions, under 50 | $24,500 |
| Catch-up at 50 or older | +$8,000 (so $32,500 in total) |
| Higher catch-up at ages 60–63 | +$11,250 instead (so $35,750 in total) |
| Everything combined — yours plus employer’s, excluding catch-ups | $72,000, and never more than 100% of your pay |
| Pay that can be counted for contributions | Up to $360,000 |
Two traps hide in that table. First, the $24,500 limit is yours, across every 401(k) you contribute to in the year — change jobs mid-year and deferrals at both employers count toward the same cap, and watching the total is your job. Second, your plan can set a lower limit than the IRS does. The IRS ceiling is a maximum, not a promise.
What is vesting, and why does it decide what you keep?
Vesting is ownership, on a schedule. Your own deferrals are vested immediately, always. Employer contributions may not be: a plan can use cliff vesting, where the match becomes fully yours only after a set period — up to three years for matching contributions — or graded vesting, where you own a growing slice each year and reach 100% by year six at the latest. Safe harbor plans are the exception: their employer contributions are fully vested at once.
Leave before you are fully vested and the unvested part of the employer’s money stays behind. So before handing in notice a few months short of a vesting milestone, check the date. Your plan statement states your vested percentage; believe that document, not a colleague’s memory of the policy.
How is a 401(k) different from an IRA?
Both shelter retirement saving from tax. Almost everything else differs, because one belongs to a workplace and the other to you.
- Who opens it. A 401(k) exists only if your employer offers one. An IRA — individual retirement account — you open yourself, at almost any bank or brokerage.
- How much you can put in. For 2026, $24,500 in a 401(k) against $7,500 across all your IRAs combined (plus a $1,100 IRA catch-up at 50+).
- The match. Only the workplace plan has one. No IRA will ever add money because you contributed.
- Investment choice. A 401(k) limits you to the plan’s menu. An IRA lets you buy almost anything the provider offers.
- Loans. A 401(k) plan may let you borrow from your own balance. An IRA never can — the IRS treats borrowing from an IRA as a prohibited transaction.
- Required withdrawals. Traditional versions of both force withdrawals from your 70s, on the schedule below. A Roth IRA never forces withdrawals during your lifetime, and a Roth 401(k) has not since 2024.
You can hold both at once, and many savers do: contribute enough to the 401(k) to take the full match, then use an IRA for extra saving or for investments the plan menu lacks, then return to the 401(k) if money remains.
When can you take money out? Withdrawal rules and the 59½ penalty
Federal law allows distributions only after a distributable event: you leave the employer, reach 59½, become disabled, die (the money passes to your beneficiary), the plan ends, or — if the plan allows it — you suffer a qualifying financial hardship.
Tax then depends on the type. Traditional withdrawals are taxed as ordinary income, in full, contributions and earnings alike. Qualified Roth withdrawals are tax-free. On top of tax, a distribution before 59½ usually carries a 10% additional tax on the taxable part. The exceptions are specific, and worth knowing exactly:
- The rule of 55. Leave your job in or after the calendar year you turn 55, and you can take penalty-free distributions from that employer’s plan. Roll the money into an IRA first and this exception is gone — IRAs do not have it.
- Substantially equal periodic payments. A set series of payments calculated from your life expectancy, kept up for at least five years or until 59½, whichever is longer.
- Disability, death, divorce orders, and certain medical and disaster situations, each with its own conditions.
A hardship distribution is not on that list, and confusing the two is expensive: a hardship withdrawal for a recognised need — medical costs, buying a main home, tuition, preventing eviction or foreclosure, funeral costs, certain home repairs — is still taxed, and still normally hit by the 10% penalty if you are under 59½. It also cannot be repaid or rolled over. The money is gone from your retirement, permanently.
Can you borrow from your 401(k)? Loans explained
If your plan allows loans — it does not have to — the IRS loan rules cap what you can take at the lesser of $50,000 or half your vested balance, with a narrow exception that can let a very small balance be borrowed up to $10,000. You generally repay within five years, at least quarterly, through payroll; a loan used to buy your main home can run longer.
You pay interest on the loan — to yourself, into your own account — which makes it sound free. It is not. The borrowed money is out of the market while you repay it, and the real risk sits at the exit door: leave or lose the job and the plan can demand the balance back. Fail to repay or roll the amount over by your tax-filing deadline and the IRS treats the unpaid balance as a distribution — taxed, plus the 10% penalty if you are under 59½.
Required minimum distributions: when the IRS makes you withdraw
Tax deferral is a loan from the IRS, not a gift, and it comes due. Under the IRS RMD rules, you must start taking required minimum distributions from a traditional 401(k) each year at age 73 if you were born from 1951 to 1959, and age 75 if you were born in 1960 or later. Your first RMD is due by April 1 of the year after you reach that age; every later one by December 31. Each year’s amount is your previous December 31 balance divided by a life-expectancy factor from the IRS tables.
Three details matter. First, if you are still working and do not own 5% or more of the business, you can delay RMDs from that current employer’s plan until you retire — old employers’ plans and IRAs get no such delay. Second, Roth 401(k) money is exempt: since 2024, designated Roth accounts have no lifetime RMDs at all. Third, the penalty for taking too little is steep — an excise tax of 25% of the shortfall, cut to 10% if you correct it within two years. Your plan administrator can calculate your amount, but the IRS holds you, not them, responsible for taking it.
What happens to your 401(k) when you leave a job?
Leaving an employer never deletes the account, but it does start a decision. Your vested balance offers four routes:
- Leave it where it is. Often allowed if the balance is large enough — plans can force out small balances, cashing out the tiniest and rolling mid-sized ones into an IRA in your name. Leaving it keeps the rule of 55 available, but you can no longer contribute.
- Roll it into your new employer’s plan. Keeps everything in one workplace account and preserves loan access. Ask for a direct, trustee-to-trustee rollover.
- Roll it into an IRA. The widest investment choice and one home for several old plans. The cost: you lose the rule of 55 for that money.
- Cash it out. Almost always the worst route before 59½: income tax, the 10% penalty, and the permanent loss of decades of tax-sheltered growth. Plans must withhold 20% for federal tax on a cash-out, which still may not cover the full bill.
Whichever rollover you choose, make it direct. If the cheque is made out to you personally, you have 60 days to deposit the full amount — including the 20% withheld, out of your own pocket — or the shortfall counts as a cash-out. An outstanding plan loan changes the maths again, so settle that before your last day if you can.
Frequently asked questions
Is a 401(k) the same as a pension? No. A pension promises a set income in retirement, with the employer carrying the investment risk. A 401(k) pays out whatever went in and grew. The risk — and the decisions — are yours.
Can I have a 401(k) and an IRA at the same time? Yes. The limits are separate — $24,500 in the 401(k) and $7,500 across your IRAs for 2026. A workplace plan can limit whether traditional IRA contributions are deductible, depending on income, but never bars you from contributing.
Is a 401(k) insured if the market falls or my employer fails? No. A 401(k) is an investment account, not a bank deposit: there is no FDIC or NCUA insurance on it, and balances fall when investments fall. Your account is held separately from your employer’s own money, so an employer bankruptcy does not make your vested balance company property — but nothing restores market losses.
This article is general information about how 401(k) plans work under IRS rules checked in November 2026 — not personal financial or tax advice. Limits change most years; check the current IRS figures before acting.