401(k)
Definition
An employer-sponsored retirement savings plan where employees contribute pre-tax income (traditional) or post-tax income (Roth), often with employer matching contributions.
A 401(k) is the most common workplace retirement plan in the United States. Named after the section of the Internal Revenue Code that governs it, the 401(k) allows employees to defer a portion of their salary into a retirement investment account, reducing their current taxable income.
For 2025, the employee contribution limit is $23,500 (or $31,000 for those 50 and older, thanks to catch-up contributions). Employer matching contributions don't count toward this limit. The total combined limit (employee + employer contributions) is $70,000 (or $77,500 with catch-up).
The two types are traditional 401(k) (contributions are pre-tax, reducing your current taxable income, with withdrawals taxed as ordinary income in retirement) and Roth 401(k) (contributions are after-tax, but qualified withdrawals in retirement are completely tax-free, including all growth).
Employer matching is essentially free money. A common match is 50% of contributions up to 6% of salary. For someone earning $100,000, contributing 6% ($6,000) gets $3,000 in employer match — a guaranteed 50% return on the matched portion. Not contributing enough to get the full match is leaving money on the table.
Investment options within a 401(k) are limited to what the plan offers — typically a selection of mutual funds, target-date funds, and sometimes a brokerage window. Expenses vary widely between plans. Once you leave an employer, you can roll the 401(k) into an IRA for more investment options and potentially lower fees.
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Frequently Asked Questions
How much should I contribute to my 401(k)?
At minimum, contribute enough to get the full employer match — it's free money. Ideally, aim for 15% of income (including employer match) for retirement savings. If you can't start at 15%, begin with the match and increase by 1% each year until you reach your target.
Should I choose traditional or Roth 401(k)?
If you expect your tax rate to be higher in retirement than now (early career, lower income), Roth is likely better. If your tax rate is high now and likely to decrease in retirement, traditional saves more. Many advisors suggest splitting between both for tax diversification.