401(k) Retirement Account

What is a 401(k)?

A 401(k) is an employer-sponsored retirement savings and investment plan. The benefit is typically optional and has eligibility requirements, such as participant age and employment timeframe. In a traditional 401(k), money is deducted from an employee's pre-tax pay each pay period and deposited into the designated investment account. Many employers offer an employer match, where they match employee contributions up to a certain percentage.

What is the 401(k) contribution limit for 2026?

It’s important to note that there are 401(k) contribution limits set by the IRS for each calendar year—there is a limit on how much an employee can contribute to their account, as well as an “overall” limit that includes other types of contribution, such as employer match, “catch-up contributions,” and employer nonelective contributions.

For 2026, the 401(k) contribution limit for individuals is $24,500. This is an increase from 2025, where the 401(k) contribution limit was $23,500.

However, if you’re past a certain age, the 2026 contribution limit to your 401(k) will be higher (known as “catch-up contributions”):

• Aged 50–59, you can contribute an additional $8,000
• Aged 60–63, you can contribute an additional $11,250

While the specific limits on overall contribution can vary by 401(k) plan type, the total combined contribution limit to an individual’s 401(k) can’t exceed 100% of their compensation or $72,000 for 2026 (whichever is less).

How does a 401(k) work?

Depending on the type of 401(k), the employee’s contribution amount is deducted from their pre- or after-tax income and deposited into an investment account.

This retirement plan is commonly offered through an employer, but self-employed professionals can open one, too.

Employers don’t generally manage the account—it’s usually handled by an outside investment firm. That firm provides participants with various investment options with the goal of growing their accounts long-term.

Most 401(k) plans allow you to start withdrawing money at age 59 ½. You can also withdraw your 401(k) if you meet the IRS criteria for a hardship withdrawal. You can draw from your 401(k) sooner, but you’ll incur a 10% early withdrawal fee.

When people with 401(k)s retire, they have several options for withdrawal, including taking a lump sum payment, taking required minimum distributions (RMD), or even converting the plan to an IRA or annuity.

How employer matching for a 401(k) works

Employer matching programs vary by company. “Matching” is where an employer contributes the same percentage as that employee up to a specified limit. According to Carry, the average employer match for a 401(k) program was between 4% and 6% in 2025.

If your employer match was 6%, your 401(k) contributions could look like the following:

• If you contributed 3% of your income, your employer would contribute 3%.
• If you contributed 5% of your income, your employer would contribute 5%.
• If you contributed 7% of your income, your employer would contribute 6% (the upper limit).

According to Vanguard, among employers that offered 401(k) plans in 2024, most (87%) offered a match program. It’s important to note that the employer match does not contribute to the individual’s $24,500 contribution limit for 2026.

How much does a 401(k) pay during retirement?

A 401(k) isn't guaranteed to pay out a specific amount. Along with the expected rate of return on investment, the amount employees get in retirement depends on several factors, including:

• How much they’ve already saved
• How close they are to retiring
• How much they make each year
• How much and how often they contribute
• How much you, as an employer, contribute
• How many years of retirement income they’ve planned for

Participants can consult a financial professional for advice or use an online 401(k) retirement calculator for a ballpark estimate based on their circumstances.

Different types of 401(k) plans: How much can employees contribute to their 401(k)?

Regardless of the type of 401(k) plan you have, your maximum elective contributions remain the same. However, these retirement plans differ in other important ways that all employees should be aware of.

Limits and matching rules for 401(k) accounts

For 2026, the maximum contribution limit is $24,500 for each employee under 50. Catch-up contributions of $8,500 are allowed for participants age 50 and older, bringing the maximum contribution for employees in that age bracket to $33,000.

Rules for employers on 401k plans

Employers enacting matching programs must abide by certain rules, such as:

• Traditional 401(k) plans: Employers must perform Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests to ensure matching contributions don’t discriminate in favor of higher-wage employees.
• Safe harbor 401(k) plans: Employer contributions must be fully vested from the moment they’re made. This means that the employee owns 100% of it and the employer can’t take it away.
• SIMPLE 401(k) plans: Designed for small businesses with fewer than 100 employees, they also require fully vested employer contributions. However, these plans aren’t subject to ADP and ACP testing.

401(k) FAQs

As 401(k)s are highly regulated by the IRS, they can be daunting. Understandably, you might have some questions around a 401(k) and how it can affect your business and employees. Read on and get the answers to some common 401(k) questions.

What happens to a 401(k) when you leave your job?

When you leave your job, your 401(k) typically stays with you. However, you can do something else with it, such as:

• Roll it into your new employer’s plan
• Roll it into an individual retirement account (IRA)
• Cash out all or a portion of the money (which may incur taxes or penalties).

If you have less than $5,000 invested, your old employer may choose not to keep your 401(k). In this case, they may cash it out and send you a check or roll it into an IRA on your behalf.

How do you roll over a 401(k)?

401(k) rollovers are usually through direct transfer, which means the funds move directly from your old account to the new one.

You can also do an indirect transfer. In this case, your old plan administrator mails you a check for the account balance. You must then deposit that check into a new account within 60 days to avoid taxes and penalties. During the indirect transfer, your old employer must hold back 20% of your balance to pay federal (and possibly state) income taxes.

At what age is 401(k) withdrawal tax-free?

401(k) withdrawals generally become tax-free at age 59 and a half. However, this only applies to those with a Roth 401(k). Traditional 401(k) owners who didn’t pay taxes on the front end will owe them in the distribution phase of the plan.

How do you borrow or cash out from 401(k)?

In some circumstances, you may be able to take money out of your 401(k) account before you reach the eligibility age. Hardship withdrawals can be approved for things like:

• Paying medical bills
• Preventing foreclosure or eviction
• Covering funeral expenses
• Paying school tuition
• Purchasing or repairing a primary residence
• Recovering from damage related to a natural disaster

Some 401(k) plans also support withdrawals for non-hardship reasons.

What is a 401(k) loan?

A 401(k) loan is an option that allows anyone with a 401(k) to borrow from their account balance. People who do this are generally required to pay the money back with interest within five years but can borrow up to 50% of their vested account balance (with an IRS-imposed limit of $50,000 minus any outstanding loan balances during the prior 12-month period). Employees won’t have to pay taxes or penalties when the loan is originated, and the interest goes into their retirement account.

Many 401(k) plans will permit withdrawals for specific reasons. This is known as a hardship distribution and is only allowed for specific circumstances, such as medical, funeral or educational expenses.