401(k)

What It Means

A 401(k) is a retirement savings plan that an employer sets up for its workers. You choose a share of each paycheck to put in, and the money is invested in funds from the plan's menu. Traditional contributions come out of your pay before income tax and are taxed when you withdraw them; if the plan offers a Roth option, contributions go in after tax and qualified withdrawals come out tax-free. Many employers add a matching contribution on top of yours.

How People Say It

• "I put 10% into my 401(k) every paycheck."
• "Does your job offer a 401(k)?"
• "I'm maxing out my 401(k) this year."

The Breakdown

Worked example. Sam earns $60,000 a year, is 38, and puts 1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more% of each paycheck into a traditional 401(k).

What the result means. Sam's $6,000 is taken out before income tax, so the pay that federal income tax is figured on drops to $54,000. He has room under the IRS cap to raise his share later, for example each time he gets a raise.

The 2026 limits, from the IRS

Your contributions and your employer's together are capped at $72,000 for 2026, before any catch-up.

Good to Know

The IRS says your own contributions are always 100% vestedVestingHow much of the money an employer puts in your retirement plan is yours to keep, which usually grows with your years of service. See more, so they're yours from day one; an employer's match may vest over a few years. Money taken out before age 59½ generally owes a 10% additional taxEarly withdrawal penaltyThe IRS 10% additional tax on money taken from a 401(k), IRA or similar account before age 59½, unless an exception applies. See more on the taxable part, on top of income tax, unless an exception applies (IRS Topic 558). When you leave a job, a direct rolloverRollover IRAAn IRA opened to receive money moved out of a workplace retirement plan such as a 401(k), usually after leaving a job. See more to a new plan or an IRATraditional IRAAn individual retirement account where contributions may be tax-deductible, growth is tax-deferred, and withdrawals are taxed as income. See more avoids the 20% withholding the IRS requires on a check paid to you. The IRS usually announces the next year's limits in the fall, so check irs.gov before you set next year's amount.

Related Terms and Categories

• Roth 401(k)

  The Roth option inside a 401(k): you contribute after tax, and qualified withdrawals, earnings included, come out tax-free.

• Vesting

  How much of the money an employer puts in your retirement plan is yours to keep, which usually grows with your years of service.

• Contribution limit

  The most the IRS lets you put into a tax-advantaged account in a year, such as a 401(k), IRA or HSA, often with a higher catch-up amount at older ages.

• Early withdrawal penalty

  The IRS 10% additional tax on money taken from a 401(k), IRA or similar account before age 59½, unless an exception applies.

• Rollover IRA

  An IRA opened to receive money moved out of a workplace retirement plan such as a 401(k), usually after leaving a job.

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