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What Is a 401(k)? How It Works, 2026 Limits and Rules

A 401(k) lets you save for retirement straight from your paycheck, often with an employer match. Here are the 2026 contribution limits, Roth vs. traditional, vesting, withdrawals and rollovers.

By Berawang News Staff
Bar chart rising over time inside a card labeled 401(k), illustrating employee and employer contributions
Berawang News

A 401(k) is a retirement savings plan offered by many U.S. employers. You choose a percentage of each paycheck to put in, the money is invested (usually in a menu of mutual funds), and it grows with tax advantages until you retire. Many employers also add money of their own, known as a match.

How a 401(k) works

  1. You sign up through your employer and pick how much of each paycheck to contribute.
  2. Your contributions come out automatically before the money reaches your bank account.
  3. Your employer may match part of what you put in, for example a share of the first few percent of your pay. Plans differ, so check your plan documents.
  4. You choose investments from the plan’s list, often including target-date funds and index funds.
  5. The account grows tax-advantaged until you withdraw it in retirement.

2026 401(k) contribution limits

Limit

2026

Employee contributions (elective deferrals)

$24,500 (up from $23,500 in 2025)

Extra catch-up, age 50 and older

$8,000

Higher catch-up, ages 60 to 63

$11,250 (instead of $8,000)

Total from you and your employer

$72,000 ($80,000 with catch-ups, up to $83,250 for ages 60–63)

Source: IRS. The IRS has not yet announced the 2027 limits; we will update this guide when it does.

New for 2026: if your wages from the employer that sponsors the plan were more than $150,000 in the prior year, your catch-up contributions must go in as Roth (after-tax) contributions, under a SECURE 2.0 rule the IRS says begins in 2026.

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

Traditional 401(k)

Roth 401(k)

Contributions

Before-tax dollars, lowering your taxable pay now

After-tax dollars, no tax break now

Withdrawals in retirement

Taxed as income

Tax-free if the distribution is qualified

Qualified withdrawal

—

Account held at least 5 years and you are 59½ or older (or disabled, or after death)

Many plans offer both. The same choice applies to IRAs; see Roth IRA vs. traditional IRA.

Vesting: when the money is yours

“Vesting” means ownership. The money you contribute from your paycheck is always 100% vested, so it is yours from day one. Employer contributions can follow a schedule, such as:

  • Cliff vesting: 100% after 3 years of service.
  • Graded vesting: 20% after 2 years, rising each year to 100% after 6 years.

If you leave before you are fully vested, you may lose the unvested part of the employer’s money.

Taking money out

  • Early withdrawals: taking money out before age 59½ generally adds a 10% additional tax on top of regular income tax, unless an exception applies.
  • The “rule of 55”: if you leave your job in or after the year you turn 55, withdrawals from that employer’s plan avoid the 10% additional tax (age 50 for qualified public safety employees).
  • Required minimum distributions: you generally must start withdrawals at age 73. Some plans let you wait until you retire if you are still working. Designated Roth 401(k) accounts have no RMDs while the owner is alive.

Changing jobs: rollovers

When you leave an employer, you can usually leave the money in the old plan, move it to your new employer’s plan, or roll it into an IRA.

  • Direct rollover (simplest): ask the plan to send the money straight to the new plan or IRA. No taxes are withheld.
  • Indirect rollover: if the check is paid to you, the plan must withhold 20% for taxes, and you have 60 days to deposit the full amount in the new account. You must make up the withheld 20% from other money to avoid tax on it.

How to make the most of a 401(k)

  • Contribute at least enough to get the full employer match, because it is part of your pay.
  • Raise your contribution when you get a raise.
  • Watch fees and favor low-cost index funds when your plan offers them; see what an ETF is for why costs matter.
  • See the long-term effect of steady saving with our compound interest calculator.

Frequently asked questions

How much can I put in a 401(k) in 2026?

$24,500 from your paycheck, plus an $8,000 catch-up if you are 50 or older, or an $11,250 catch-up if you are 60 to 63.

Is a 401(k) better than an IRA?

They work well together. A 401(k) has much higher limits and often an employer match, while an IRA gives you more investment choices. Many people do both.

What happens to my 401(k) if I quit?

Your own contributions and vested employer money stay yours. You can leave them in the plan, move them to a new employer’s plan, or roll them into an IRA.

Can I withdraw from my 401(k) early?

Yes, but withdrawals before 59½ are usually taxed as income plus a 10% additional tax, unless an exception such as the rule of 55 applies.

This guide is for education only and is not tax, legal or investment advice. Plan rules vary; check your plan documents and IRS.gov or a tax professional for your situation.

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