What is a 401(k)?

A 401(k) is an employer-sponsored retirement savings plan governed by IRS Section 401(k). You elect to have a percentage of each paycheck deposited directly into the account before (traditional) or after (Roth) taxes are taken out. The money stays invested — usually in mutual funds or target-date funds your employer selects — and compounds tax-deferred until you start taking withdrawals in retirement.

Traditional 401(k) vs. Roth 401(k)

The key difference is when you pay taxes. A traditional 401(k) reduces your taxable income today — you pay taxes when you withdraw in retirement. A Roth 401(k) uses after-tax dollars now, so qualified withdrawals in retirement are completely tax-free. Which is better depends on whether you expect your tax rate to be higher today or in retirement — a question worth discussing with a financial professional.

Contribution limits

For 2024, the IRS employee contribution limit is $23,000 per year ($30,500 if you're age 50 or older, thanks to the $7,500 catch-up contribution). These limits apply to all elective deferrals combined across all 401(k) plans you participate in. Employer matching contributions do not count against your personal limit — they count against a separate combined limit of $69,000 ($76,500 with catch-up).

• Contributions reduce your taxable income today (traditional) or grow tax-free (Roth).
• 2024 employee limit: $23,000; $30,500 if age 50+ with catch-up.
• Withdrawals before age 59½ generally trigger a 10% early-withdrawal penalty plus ordinary income tax.
• Required minimum distributions (RMDs) begin at age 73 under SECURE 2.0.
• Many employers match a portion of what you contribute — free money toward retirement.

Accessing your money

Money in a 401(k) is meant to stay invested until at least age 59½. Early withdrawals generally incur a 10% penalty on top of ordinary income taxes. There are limited exceptions — called hardship withdrawals — but they still trigger income tax. If you leave your employer, you can typically roll the balance into an IRA or your new employer's plan without taxes or penalties.