401(k)

A 401(k) plan is the cornerstone of workplace retirement saving in the United States, taking its name from Section 401(k) of the Internal Revenue Code. Employees elect to defer a percentage of each paycheck directly into their account before the money ever hits their bank, reducing their current taxable income in the process. The invested funds grow tax-deferred, meaning you pay no federal income tax on gains, dividends, or interest until you withdraw the money in retirement.

For 2025, the employee elective deferral limit is $23,500. Workers aged 50 or older may make an additional 'catch-up' contribution of $7,500, bringing their ceiling to $31,000. SECURE Act 2.0 introduced an enhanced catch-up for those aged 60-63: $11,250 in 2025, making their total limit $34,750.

Many employers sweeten the deal with a matching contribution — a common formula is 50 cents for every dollar the employee contributes, up to 6% of salary. This match is essentially free money and represents an immediate 50% return on the contributed dollars. The combined limit from all sources (employee deferrals plus employer contributions) is $70,000 for 2025, or $77,500 for those 50 and older.

Participants typically choose from a menu of mutual funds and target-date funds curated by the plan sponsor. The investments grow inside a protected account governed by ERISA (the Employee Retirement Income Security Act), which sets fiduciary standards to protect participants. Withdrawals before age 59½ are generally subject to a 10% early withdrawal penalty on top of ordinary income tax, with limited exceptions such as disability or substantially equal periodic payments under Rule 72(t).

Roth 401(k) subaccounts, now available in most plans, allow after-tax contributions that grow tax-free, with qualified withdrawals in retirement completely free of federal income tax. Starting in 2024, employer matching contributions can also be directed into Roth accounts. The 401(k) remains the most widely used private retirement vehicle in America, holding trillions in assets across tens of millions of participant accounts.