401(k)

How it works

You choose how much of your pay to contribute, the amount comes out of each paycheck, and you pick investments from the plan’s menu. For 2026, you can contribute up to $24,500 of your own pay. If the plan allows catch-up contributions, people who are 50 or older by the end of the year can generally add up to $8,000 more, or up to $11,250 for those who turn 60 to 63 during the year, if the plan offers the higher amount. Starting in 2026, if your pay from that employer topped $150,000 the year before, those catch-up contributions have to be Roth (after-tax) contributions. If the plan document permits, your employer can also add matching contributions based on what you put in.

Traditional, or pre-tax, contributions aren’t subject to federal income tax withholding when they come out of your pay, though they still count as wages for Social Security and Medicare taxes; you pay income tax when you withdraw the money. With a Roth option, often called a Roth 401(k), designated Roth contributions come from pay that has already been taxed, and qualified withdrawals are tax-free. Not every plan offers the Roth option.

Before choosing an amount, it helps to know the match formula, the vesting schedule for employer money, the investment options and their costs, and the plan’s withdrawal rules. Money taken out before age 59½ may owe an additional 10% tax on top of regular income tax unless an exception applies, so a 401(k) is built for money meant to stay invested until retirement.

Related terms

Sources and further reading

• IRS: Retirement plan contributions
• IRS: Topic 424 — 401(k) plans
• IRS: 2026 retirement plan contribution limits

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.