A 401(k) is a retirement savings plan sponsored by an employer, allowing employees to save and invest a portion of their pre-tax income. Contributions are automatically deducted from paychecks, making it a convenient way to save consistently. Many employers also offer matching contributions, which can significantly boost retirement savings. There are generally two types of 401(k) plans: traditional and Roth. With a traditional 401(k), contributions are made with pre-tax dollars, reducing taxable income in the present, while withdrawals in retirement are taxed as ordinary income. Roth 401(k) contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
Key features of 401(k) plans include tax advantages, automatic payroll deductions, and investment growth potential. Participants can choose from a range of investments, such as mutual funds, ETFs, and target-date funds, to align with their risk tolerance and retirement goals. The IRS sets annual contribution limits, which for 2025 is $23,500 for those under 50. Those age 50 and older can contribute an additional $7,500 as a "catch-up" contribution, for a total of $31,000. For 2026, the employee contribution limit increases to $24,500, with a $8,000 catch-up contribution for those 50 and over. Individuals aged 60 to 63 may be able to make a "super" catch-up contribution. 401(k) plans are widely available through employers as part of their benefits packages. Self-employed individuals and small business owners can also utilize individual 401(k) plans.
