401(k)

A 401(k) is a tax-advantaged retirement savings plan offered by employers. Named after section 401(k) of the Internal Revenue Code, it's one of the most powerful wealth-building tools available to American workers.

2026 Contribution Limits:

• Employee contribution: $24,500
• Catch-up (age 50+): Additional $7,500
• Total including employer: $70,500

Tax Treatment:

Traditional 401(k):

• Contributions reduce taxable income today
• Grows tax-deferred
• Taxed as ordinary income at withdrawal
• Required Minimum Distributions (RMDs) at age 73

Roth 401(k):

• Contributions made with after-tax dollars
• Grows tax-free
• Qualified withdrawals are tax-free
• Still has RMDs (unlike Roth IRA)

Employer Match: The "free money" that makes 401(k) essential:

• Common: 50% match up to 6% of salary
• Example: You contribute $6,000, employer adds $3,000
• Always contribute enough to get full match!

Investment Options:

• Target-date funds
• Index funds
• Company stock (limit to <10% of portfolio)
• Bond funds

Withdrawal Rules:

• 10% penalty before age 59½ (with exceptions)
• Loans possible (but not recommended)
• Hardship withdrawals for emergencies