What Is a 401(k) and How Does It Work?
A 401(k) is a retirement savings account you get through your job. Money comes straight out of your paycheck, often with free money added by your employer, and grows with a tax break until retirement.
By Bogdan · Updated
A 401(k) is the most common workplace retirement account in the US. It’s named after the section of the tax code that created it — section 401, paragraph (k).
Explain it like I’m 5
Imagine a special piggy bank at your job. Every payday, a few coins go into it before you even see your pay. Sometimes your boss drops in extra coins just because you did (that’s the match — free money!).
The coins inside get to grow, and the tax collector agrees not to take a share until you’re old enough to open the piggy bank. If you break it open early, you usually pay a fine.
Already thinking about taking money out? See what you’d owe with the 401(k) withdrawal tax calculator.
How it works, step by step
- Sign up through your employer (many enroll you automatically).
- Choose how much — a percentage of each paycheck, like 6%.
- Get the match, if your employer offers one.
- Pick investments from the plan’s menu — often a target-date fund is the default.
- Let it grow until retirement.
2026 limits
| 2026 | |
|---|---|
| Your contributions | $24,500 |
| Catch-up, age 50+ | +$8,000 |
| Catch-up, age 60–63 | +$11,250 (instead of $8,000) |
| Total, you + employer | $72,000 (plus catch-up) |
Traditional vs. Roth 401(k)
- Traditional: money goes in before tax, lowering your tax bill today. You pay tax when you withdraw.
- Roth: money goes in after tax. Qualified withdrawals in retirement are tax-free.
Not sure? See Roth vs. traditional and Roth IRA vs. 401(k).
What it can grow to
Put in $500 a month, get a $150 monthly match, and earn 7% a year: after 30 years you’d have about $793,000. Without the match, about $610,000 — the match alone adds about $183,000.
Wondering if you’re on track? See 401(k) by age.
Vesting
Your own contributions are always 100% yours. Employer money may vest over time — for example 20% a year over 5 years. Leave before you’re fully vested and you may lose part of the match.
Common mistakes
- Not contributing enough to get the full match.
- Cashing out when you change jobs — see 401(k) early withdrawal for what that costs.
- Never checking your investments — make sure money isn’t sitting in cash.
- Borrowing from it casually; a 401(k) loan can become taxable if you leave your job and don’t repay it.
Frequently asked questions
What is a 401(k) in simple terms?
A retirement savings account offered by your employer. You choose a percentage of each paycheck to put in, it’s invested (usually in funds), and it grows with a tax break. Many employers add money too, called a match.
How much can I put in my 401(k) in 2026?
Up to $24,500 of your own money. If you’re 50 or older you can add an $8,000 catch-up ($11,250 at ages 60–63). Including employer contributions, the total limit is $72,000 (plus catch-up).
What is a 401(k) match?
Money your employer adds when you contribute. A common formula is 50% of what you put in, up to 6% of your pay. On a $60,000 salary, putting in 6% ($3,600) gets you $1,800 more from your employer each year.
When can I take money out of my 401(k)?
Without penalty, generally from age 59½. Earlier withdrawals usually mean income tax plus a 10% penalty, with some exceptions — such as leaving your job in or after the year you turn 55.
What happens to my 401(k) when I leave my job?
It stays yours (your own contributions always are; employer money may depend on a vesting schedule). You can leave it in the old plan, roll it into your new employer’s plan, or roll it into an IRA. Avoid cashing it out, which triggers tax and often a penalty.
This article is for general education and is not financial, investment or tax advice. Rates, rules and limits change; check current terms with your bank or the IRS. See our disclaimer.