Glossary
401(k) plan
A US employer-sponsored retirement plan that lets workers contribute part of their pay before tax or as Roth, often with a match.
On this page
A 401(k) is a US workplace retirement plan, named after a section of the Internal Revenue Code, in which an employee directs part of each paycheck into an investment account the employer sponsors. It is the main retirement savings vehicle for most private-sector workers, so its tax treatment and contribution limits shape how millions of people invest.
How it works
You choose a percentage of pay to defer. With a traditional 401(k) the money goes in before income tax and is taxed when you withdraw it. With a Roth 401(k) (if the plan offers one) you contribute after-tax pay and qualified withdrawals are tax-free. Many employers add a matching contribution, which may vest over several years of service.
For 2026 the IRS caps employee deferrals at $24,500. Workers aged 50 or older may add an $8,000 catch-up, and those aged 60 to 63 get a larger $11,250 catch-up instead. Employee plus employer money together may not exceed $72,000 (the §415(c) limit), not counting catch-ups.
What to watch for
- Investment menu and fees. You can only pick from the funds the plan offers, and their expense ratios vary widely.
- Early withdrawals. Taking money out before age 59½ generally triggers income tax plus a 10% additional tax, with some exceptions.
- Changing jobs. Balances can usually stay in the old plan or roll into a new plan or an IRA without tax if done as a direct rollover.
Limits are indexed to inflation and change most years, so check the current IRS figures.