401(k) Basics: How Employer Retirement Accounts Work and How to Contribute More

A 401(k) is a retirement savings account offered through your employer. The name comes from the section of the tax code that created it. You do not need to know what the number means, only that it is one of the most powerful tools available for saving for retirement. Money goes into the account directly from your paycheck before income taxes are calculated, which lowers the amount of income you are taxed on each year.

The money grows inside the account without being taxed each year. You only pay income taxes when you withdraw the money in retirement. This is called "tax-deferred" growth. And it allows your savings to compound faster than if taxes were taken out along the way.

The most valuable feature of many 401(k) plans is the employer match. This is when your employer adds money to your account based on how much you contribute. A common match is "50% of your contributions up to 6% of your salary" — which means if you earn $50,000 and contribute 6% (which is $3,000), your employer adds another $1,500. That is free money that goes directly into your retirement account just for participating.

In 2026, you can contribute up to $23,500 per year to a 401(k) if you are under 50. If you are 50 or older, the limit is $31,000 due to a "catch-up contribution" provision designed to help people save more as retirement approaches.

When you leave a job, your 401(k) money stays yours. You can leave it in your former employer's plan, roll it over into your new employer's plan, or move it into an IRA. Withdrawing the money early (before age 59½) comes with taxes plus a 10% penalty. So it is best to leave retirement savings alone until you actually retire.