401(k)

You pick a percentage or dollar amount of each paycheck, and your employer sends it to the plan before you are paid. A traditional, or pre-tax, election leaves the money out of your taxable wages, lowering this year’s income tax, and it grows untaxed until you withdraw it. A Roth 401(k) election is taxed now, and qualified withdrawals later are tax-free. Either way, your deferrals still count as wages for Social Security and Medicare tax.

Many employers add a 401(k) match on what you save or a flat employer contribution for every eligible worker. Your own deferrals are always yours, while employer money can follow a vesting schedule. You invest through the plan’s fund menu, often with a target-date fund as the default, and the balance rises and falls with those funds, minus fees.

As a defined contribution plan, a 401(k) promises no set payout: what you end up with depends on how much goes in, for how long and what it earns.

The IRS sets two separate contribution limits. Your own deferrals, pre-tax and Roth together, are capped per person across every 401(k), 403(b) and Thrift Savings Plan you join in the year, so a second job does not double your room. Total additions, meaning your deferrals plus employer money, after-tax contributions and reallocated forfeitures, are limited separately within each unrelated employer’s plans, which is why a side business can still fund a solo 401(k). A plan can set a lower cap or hold back highly compensated employees to pass its nondiscrimination tests. Deferrals above the personal limit should come out, with their earnings, by April 15 of the next year; left in, they are taxed twice.

A 401(k) is built to stay put until you leave the job or reach 59½. While you still work for the sponsor, the plan can generally release your deferrals only at 59½, for a financial hardship, on disability or death, or when the plan ends. Most withdrawals before 59½ also owe a 10% additional tax on top of income tax, although the rule of 55 waives it when you leave the employer in or after the year you turn 55. The early withdrawal penalty page lists the other exceptions.

Your deferrals and vested employer money go with you; unvested employer money stays behind. You can usually leave the account in the old plan if it allows that, move it to your new employer’s plan, roll it to an IRA, or cash it out. A direct rollover moves the money from trustee to trustee with no tax withheld. A check paid to you has 20% withheld for federal income tax, and you must redeposit the full amount within 60 days, replacing the 20% from other money, or the shortfall is taxed; the IRA rollover page covers both routes.

Cashing out is the costly option: the whole taxable amount becomes ordinary income for the year, and before 59½ the 10% additional tax usually applies unless you left in or after the year you turned 55. Staying in a workplace plan keeps the rule of 55 and plan loans available; an IRA usually offers wider investment choice but loses both. Keeping pre-tax money out of IRAs can also matter if you later want a backdoor Roth IRA, because the pro-rata rule counts IRA balances but not 401(k) balances.

An IRA is an account you open on your own; a 401(k) comes with a job. Many savers use both: the 401(k) for its higher limit and any employer money, the IRA for wider investment choice or a Roth when the plan lacks one. Contributing to a 401(k) never stops you from funding an IRA, but being covered by a workplace plan can limit the deduction for a traditional IRA. For 2026 that deduction phases out between $81,000 and $91,000 of modified AGI for single filers, and between $129,000 and $149,000 for a married couple filing jointly when the contributor is covered.