What Is a 401(k)?

A 401(k) is an employer-sponsored retirement savings account that allows you to invest a portion of your paycheck before taxes are taken out. The money grows tax-deferred — you pay no taxes on gains until you withdraw the money in retirement. Many employers also match a portion of your contributions, which is essentially free money added to your retirement savings.

The Employer Match: Free Money You Cannot Afford to Miss

The most important rule in personal finance: always contribute enough to get the full employer match. If your employer matches 50% of contributions up to 6% of your salary, and you earn $60,000, contributing 6% ($3,600) gets you an additional $1,800 from your employer — an instant 50% return on your investment. Not contributing enough to get the full match is leaving part of your compensation on the table.

2024 Contribution Limits

  • Under 50: $23,000 per year
  • 50 and older (catch-up contribution): $30,500 per year
  • Total including employer contributions: $69,000 per year

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

Many employers now offer both Traditional and Roth 401(k) options. Traditional contributions are pre-tax (you pay taxes in retirement), while Roth contributions are after-tax (withdrawals in retirement are tax-free). The general rule: choose Traditional if you expect to be in a lower tax bracket in retirement; choose Roth if you expect to be in a higher bracket. For most people in their 20s and 30s, the Roth 401(k) is the better choice.

How to Choose Your Investments

Most 401(k) plans offer a menu of mutual funds and ETFs. The simplest and most effective approach is to choose a target-date fund matching your expected retirement year (e.g., "Target Date 2055 Fund"). These funds automatically adjust their asset allocation — shifting from aggressive stocks to conservative bonds — as you approach retirement. If your plan does not have target-date funds, build a simple three-fund portfolio: a US stock index fund, an international stock index fund, and a bond index fund.

What Happens When You Leave Your Job?

When you leave an employer, you have four options for your 401(k): leave it with your old employer, roll it over to your new employer's plan, roll it over to an IRA, or cash it out (avoid this — you will owe income taxes plus a 10% early withdrawal penalty). Rolling over to an IRA gives you the most investment options and lowest fees.

The Bottom Line

Start contributing to your 401(k) today, contribute at least enough to get the full employer match, and invest in low-cost index funds or a target-date fund. Use our Retirement Calculator to see how your 401(k) contributions will grow into the retirement nest egg you need.