401(k) basics
Contribution limits, employer matches, tax treatment and the order in which to use the plan.
401(k) — Your Employer's Gift to Wealth Building
A 401(k) match is the only guaranteed return in personal finance. Not "guaranteed" the way an annuity salesperson means it. Guaranteed the way a paycheck is: your employer has agreed in writing to add money to your account when you add money to it, and the amount is set by a formula printed in the plan documents.
Everything else you do with money involves a forecast. Stocks might return 7%. A house might appreciate. The match is not a forecast. It is a contractual transfer, and a common version pays 50 cents for every dollar you put in, on the first 6% of salary. A 50% gain before the market does anything at all.
So the most expensive mistake in this guide is not picking the wrong fund. It is leaving four figures a year in an account with your employer's name on it.
The arithmetic of one checkbox
Take a $65,000 salary and that formula. Six percent of $65,000 is $3,900, deferred across the year. The employer adds half of that, $1,950, as long as you keep contributing at least 6% every pay period.
- 01You defer 6%$3,900 from your paychecks, before income tax
- 02The employer matches half$1,950, on the same paychecks
- 03$5,850 goes into the accountInvested in the fund you picked
- 04It compounds untouchedFor decades, until you retire
Contribute 3% and you collect $975 of the match. Contribute nothing and you forfeit all of it for that year, with no way to catch up later.
Illustrative. A 50% match on the first 6% of salary; check your own plan's formula.
That $1,950 is not a bonus. It is money your employer already budgeted as part of your pay. There is no catch-up provision, no retroactive election, and nobody in HR who will call to remind you.
Watch what a partial contribution does over a working life. Three percent instead of six on the same salary, both invested at 7% for thirty years:
- 6% plus full match
- 3% plus half the match
The 6% saver puts in $162.50 more a month of their own money and ends with twice the balance.
Illustrative. $65,000 salary with no raises, 50% match up to 6%, 7% annual return compounded monthly, 30 years.
- Your contributions
- Employer match
- Investment growth
The match is less than a tenth of the final balance, but it grows alongside your own money: on its own it compounds to about $198,000.
Illustrative. $3,900 a year from you and $1,950 from the employer for 30 years, 7% a year compounded monthly.
Six percent is a good first answer, not a permanent one. Here is the same $65,000 salary if you keep raising the rate while the employer keeps adding $1,950:
Every step up is worth more than the last, because thirty years of compounding sit on each extra dollar.
Illustrative. $65,000 salary, 50% match up to 6%, 7% annual return compounded monthly, 30 years. The maximum assumes $24,500 a year from you.
Vesting is where the gift has a string attached
Employer money is not always yours immediately. Your own deferrals are always 100% yours, in every plan. Vesting applies only to the match.
- 3-year cliff
- 5-year graded
Under a cliff you own nothing until the third anniversary and everything after it. Under a graded schedule you earn a slice each year.
Two common schedules. Some plans vest immediately; the law caps a cliff at three years and a graded schedule at six.
The practical consequence: know your number before you accept an offer, not during your exit interview. Under a 3-year cliff with a $1,950 annual match, leaving at month 30 abandons about $4,875 of employer money plus its growth. That is real, but a bad job held two extra years to protect $5,000 is usually the more expensive decision.
Traditional or Roth
Most plans now offer both. The choice comes down to your tax rate on the money today against your tax rate when you take it out.
- Tax now
- Better: Lower: $3,900 comes off taxable income
- None saved today
- Tax in retirement
- Every withdrawal is income
- Better: Tax-free after 59½ and five years
- Required minimum distributions
- From age 73
- Better: None since 2024
- Best when
- Today's rate is higher than your retirement rate
- Today's rate is low, or likely to rise
VerdictA single filer on $65,000 sits in the 12% federal bracket. That is a low rate to lock in, which makes the Roth side attractive. In your peak earning years the deduction usually wins.
2026 federal brackets and a standard deduction of $16,100 for single filers. State taxes vary.
On a $65,000 salary, deferring $3,900 as traditional saves about $468 of federal income tax this year at 12%. The Roth gives that up in exchange for tax-free withdrawals later. Most people assume their rate will be lower in retirement and use that to justify the deduction, but once Social Security and required distributions stack up, many retirees land in the same 12% or 22% bracket they worked in.
So a defensible position: while your income is modest or still climbing, take the Roth. In your peak earning years, take the deduction. If you cannot decide, split it; many plans let you send part of each paycheck to each side, and having both buckets in retirement is worth more than being right about a forecast.
From 2026, if you earned more than $150,000 in FICA wages the year before, any catch-up contributions from age 50 must go to the Roth side.
The fund menu is smaller than it looks
Most plans offer fifteen to thirty funds, which is not the same thing as choice.
A target date fund matching your expected retirement year is a complete answer for most people. It rebalances itself, is often among the cheapest options in the plan, and removes the two decisions people get wrong most often. If your plan's target date fund charges under 0.20%, stop there.
Build your own only if the target date fund is expensive or you want the control:
| Piece | Share of the account | What to check |
|---|---|---|
| Total US stock market index | 60–70% | Expense ratio under 0.10% |
| International stock index | 20–30% | Expense ratio under 0.15% |
| Bond index | 0–20%, rising with age | Expense ratio under 0.10% |
A one-point fee difference on a thirty-year balance costs six figures. If every option in your plan charges above 0.50%, contribute exactly enough to collect the full match and send the rest to an IRA, where you pick the funds.
If you can only afford the match right now, fine. What is not fine is leaving the rate at 6% for a decade because you never revisited an onboarding form. Raise it by a point once a year, ideally the day after a raise. One point of $65,000 is $650 a year, about $25 a paycheck. Five years of that takes you from 6% to 11%.
Order of operations
The accounts compete for the same paycheck, so the sequence matters more than the amounts.
- 01Enough to capture the full matchNothing else on this list returns 50% with a contract behind it6% here
- 02One month of expenses in cashStops a car repair from turning into a 401(k) loanA buffer
- 03The HSA, with a qualifying health plan2026 limits. Tax-free in, while growing, and out for medical costs$4,400 / $8,750
- 04A Roth or traditional IRA2026 limit, and you choose the funds$7,500
- 05The rest of the 401(k) allowancePlus $8,000 from age 50Up to $24,500
- 06A taxable brokerage accountNo tax break, no withdrawal rulesNo cap
Fill each level before the one above it. The match sits at the bottom because it is the only guaranteed return on the list.
IRS contribution limits for 2026.
Three ways people give the money back
Cashing out after a job change. A $10,000 balance taken as cash instead of rolled over is hit with a 10% penalty plus income tax. At a 12% federal rate that is $2,200 gone before any state tax, and the decades of growth go with it. A direct rollover to the new employer's plan or to an IRA is not taxable.
Borrowing from the plan. You repay yourself with interest, which sounds neutral, but the money is out of the market while you repay it. Leave the job with a loan outstanding and the balance can become a taxable distribution with the penalty attached. It is a last resort, not a cheaper bank.
Never checking the beneficiary form. The form, not your will, decides who gets the account. A former partner named years ago can still inherit it unless someone changes the paperwork.
Doing it this week
Log in to the plan website. Find the match formula and the vesting schedule in the summary plan description. Set your deferral to at least the percentage that captures the full match. Choose one fund, probably the target date fund closest to the year you turn 65. Turn on an automatic annual increase of one percentage point. Check that a beneficiary is named.
Under an hour of work, worth $1,950 this year and about $198,000 of employer money by retirement on a $65,000 salary. The 401(k) is not a complicated account. It is a simple one that most people never finish setting up.
56 more deep dives are in the Navigator library.
