401(k) and Roth 401(k)

In short

You have probably wondered what a 401(k) actually means for your own paycheck. It is a retirement savings account your job sets up, and your money grows in it without yearly tax. A traditional 401(k) takes your money before tax, so you pay tax when you withdraw it. A Roth 401(k) takes your money after tax, so qualified withdrawals come out tax free. If your employer offers a match, that is extra pay, and it is worth collecting every dollar. Look up this year's limit on the IRS page called 401(k) Plans, and start there.

The whole of it

What it is

A friend of mine once called a 401(k) a lunchbox your employer hands you. The lunchbox is not the food. It is only the container. A 401(k) holds your retirement savings, and the name comes from a section of the tax code, which is the rulebook the government uses to decide who owes what. Inside it you can hold stock funds and bond funds, which are pools of money that many people invest in together. Your employer picks which funds are on the menu. The IRS sets how much you can put in each year. You own what you put in. Always.

How it works

I once watched a man at a country store drop a coin in a jar every Friday, rain or shine. By the time his daughter married, he had more than he expected. A 401(k) works on that same patient idea. Each payday, your employer takes the amount you chose and sends it to your account before you ever touch it.

With a traditional 401(k), the money goes in before income tax is taken from your pay. Your taxable income is smaller today. You pay tax on the money when you take it out in retirement. With a Roth 401(k), the money goes in after tax, so you have already paid what you owe. When you take it out later, the growth comes out tax free, as long as you meet the plan's rules.

Both kinds grow without being taxed each year. That is the main gift here. If your employer matches part of what you put in, they add their own money up to a set point. That match is part of your pay. Skipping it is like handing some of your wages back.

The numbers, and where to find yours

You have probably noticed that tax numbers change from year to year. I will not hand you a figure that may be wrong by the time you read it. The IRS posts the official contribution limits on its page called 401(k) Plans at irs.gov, and that page is the source to trust above anything else, including this guide.

Three limits matter to you. The first is the most you can put in yourself in a year, which is the current figure, which the official source publishes each year. The second is the extra amount allowed for people age the current figure, which the official source publishes each year and older, which the IRS calls a catch up contribution, and that extra is the current figure, which the official source publishes each year. The third is the combined cap on what you and your employer can add together, which is the current figure, which the official source publishes each year. Your employer's match does not count against your own limit, but it does count toward the combined cap.

The site fills in each verified figure with its source and date. Check it fresh. Laws change.

A worked example

If you are holding this and wondering what the math looks like, let me tell you about a woman named Rosa. She earns $52,000 a year. She puts 8 percent of each paycheck into her traditional 401(k). Her employer matches 50 percent of what she puts in, up to 6 percent of her salary.

Her own yearly contribution is $52,000 times 0.08, which is $4,160. To find what the employer will match, start with the base. That is $52,000 times 0.06, which is $3,120. The employer pays half of that base, so $3,120 times 0.5 is $1,560.

Now add the two. Rosa's $4,160 plus the employer's $1,560 is $5,720 in her account for the year. She only chose to send $4,160 of it herself.

Because her money went in before tax, her taxable wages shrink. That is $52,000 minus $4,160, which is $47,840. You can check each step by multiplying her pay by the percentages shown.

Where it goes wrong

I once knew a fellow who planted a fine garden and then walked away before the last frost. He lost most of it. People do the same thing with a 401(k) when they cash it out early. The IRS page on early withdrawals, called Retirement Topics: Exceptions to Tax on Early Distributions, explains that taking money out before age 59 and a half can add an extra tax on top of the income tax you owe. That extra tax is 10 for 2025 (source, checked 9/27/2026). Check that page for the exceptions and the current rules.

Another trouble is not putting in enough to earn the full match. That leaves part of your pay uncollected. Some people also leave their money in the default fund and never look at it again. A 401(k) does not manage itself. You have to look.

There is one more place things go sideways. Required minimum distributions, which the IRS calls RMDs, are yearly withdrawals the law makes you start taking at a set age. The IRS explains them on its page called Retirement Topics: Required Minimum Distributions. Read it straight from the source. Missing one can bring a penalty.

Questions to answer before you leave this page

If you are feeling a little unsure about your next step, I want to leave you with a few honest questions, not to overwhelm you, but because you deserve to think it through the way a good friend would. Does your employer offer a 401(k) or a Roth 401(k), and have you read the enrollment papers to see what your choices are? Do you know your employer's match formula, and are you putting in enough to collect every dollar of it? Have you compared the traditional and Roth versions with someone who knows your tax situation, since the right pick depends on whether you expect to owe more tax now or later? Do you know which funds your plan offers, and does your current pick still fit your life? And have you visited the IRS 401(k) Plans page lately, so you know exactly how much room you have left this year to fill that lunchbox a little more?