A 401(k) is a tax-advantaged retirement savings account offered through your employer. You contribute a portion of each paycheck — before or after taxes — and your money grows until you withdraw it in retirement. Consult a financial professional about your specific situation.
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.
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.
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).
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.