It’s an employer-sponsored retirement account that lets you contribute a portion of your paycheck before taxes come out. You invest that money, and let it grow tax-deferred until retirement. The name comes from the section of the Internal Revenue Code that created it. Your employer deducts contributions automatically from your paycheck, which is part of why it’s one of the easier ways to save consistently. The money never lands in your checking account for you to spend on something else first.

Traditional 401(k) contributions reduce your taxable income for the year you make them. If you earn $75,000 and contribute $7,500 to a traditional 401(k), the IRS generally taxes you as though you earned $67,500. You pay tax on the deferred amount, and any growth, later, when you withdraw it in retirement.

Many employers match a portion of what you contribute, up to a set limit, as an incentive to participate. A common structure is a 50% match up to 6% of salary, meaning the employer contributes 50 cents for every dollar you put in, up to 6% of your pay.

On a $75,000 salary, contributing 10% of pay ($7,500 a year) with that match structure means the employer adds another $2,250 a year. That’s 50% of the matched 6%, or $4,500, times 50%. Combined, that’s $9,750 going into the account annually from a $7,500 contribution out of your own paycheck. Contributing less than the match threshold means leaving part of that employer money unclaimed. That’s why financial advisors so consistently emphasize contributing at least enough to capture the full match, before directing savings elsewhere.

The IRS sets an annual limit on how much you can contribute to a 401(k) through your own paycheck deferrals. For 2026, that limit is $24,500. Workers age 50 and older can contribute an additional catch-up amount of $8,000, for a total of $32,500. A further, higher catch-up limit of $11,250 applies specifically to workers aged 60 through 63, under rules introduced by the SECURE 2.0 Act. That brings their total allowed contribution higher still. These limits apply to your own contributions. Employer matching contributions don’t count against this specific cap, though a separate, higher combined limit applies to the total of employee and employer contributions together.

Many employer plans now offer a Roth 401(k) option alongside the traditional version. You make a traditional 401(k) contribution pretax, lowering your taxable income now. You pay ordinary income tax on withdrawals in retirement. A Roth 401(k) contribution, by contrast, uses money you’ve already paid tax on. It doesn’t lower your taxable income today, but qualified withdrawals in retirement (including all the investment growth) come out entirely tax-free.

The choice between the two often comes down to a bet on your own future tax bracket. If you expect to be in a lower tax bracket in retirement than you are now, the traditional option’s upfront deduction is generally more valuable. If you expect to be in the same or a higher bracket later, paying tax now through the Roth option can work out better. You lock in today’s rate on money the IRS might otherwise tax at a higher rate down the road.

Your own contributions are always 100% yours immediately. Employer matching contributions are often subject to a vesting schedule. That means you earn full ownership of that money gradually, over a set number of years of employment, rather than all at once. Leave the company before you’re fully vested, and you can forfeit some or all of the unvested employer contributions, even though the money technically sat in your account. Vesting schedules vary by employer; your plan’s summary description details yours.

A common structure is graded vesting, where a set percentage of employer contributions becomes yours each year, reaching full ownership after several years. Some employers instead use cliff vesting, where you own none of the match until a specific milestone, often three years. At that point, you become fully vested all at once. Checking your own plan’s vesting schedule matters most if you’re weighing a job change. Leaving shortly before a vesting milestone can mean forfeiting a meaningful amount of already-earned match money.

A 401(k) doesn’t disappear when you change employers. Common options include leaving the money in the old plan if allowed, rolling it into your new employer’s 401(k), or rolling it into an individual retirement account (IRA). Cashing it out entirely is generally the least favorable option for anyone under retirement age. It typically triggers both ordinary income tax and an additional early withdrawal penalty on top.

Rollovers, when done correctly as a direct transfer between accounts, don’t trigger taxes or penalties, since the money never technically passes through your own hands. An indirect rollover works differently: your plan issues a check to you personally. That comes with a stricter deadline, typically 60 days, to redeposit the full amount into a new qualified account. Miss that window, and the IRS can treat the transaction as a taxable withdrawal instead.

Contributions don’t just sit as cash. You invest them according to choices you make from a menu of options your employer’s plan offers. That’s typically a selection of mutual funds spanning different risk levels, from conservative bond funds to more aggressive stock funds. It also often includes target-date funds that automatically shift toward a more conservative mix as you approach a chosen retirement year. The account’s eventual value depends on how much you contribute, how you invest it, and how long it stays invested. Those are the same three levers that drive growth in any long-term investment account.

Fees matter more than many participants realize. Every 401(k) plan carries some combination of administrative fees and the expense ratios of the specific funds offered. Those costs come out of the account’s returns, whether or not you actively notice them. A plan with meaningfully higher fees than another, holding everything else equal, will produce a smaller balance over a multi-decade career. That’s simply because costs consume a larger share of the growth along the way.

Your eventual 401(k) balance depends on your salary, contribution rate, employer match, assumed investment return, and years until retirement. Our 401(k) Calculator models all of these together, showing your combined annual contribution and a projected balance at retirement.