Terms of Use

Definition:

A 401(k) plan is offered by employers to allow you to set aside money for retirement on a tax-advantaged basis. You can contribute pre-tax dollars and then invest those dollars in the investment options provided by your employer for the purpose of saving for retirement.

The earnings on your investments are tax-deferred until retirement. Your employer may also make matching contributions to your account.

401(k) plan limits:

401(k) Plan Limits
  2026
Elective Deferrals $24,000
Annual Defined Contribution Limit (Total Employee + Employer Contribution) $72,000
Annual Compensation Limit (Max salary considered for contributions) $360,000
Catch-Up Contribution Limit (Age 50-59 and 64+) $7,500
Super Catch-Up Limit (Employees aged 60-63) $11,250
Highly Compensated Employees (threshold for nondiscrimination testing) $165,000
Key Employees (threshold for nondiscrimination testing) $235,000

401(k) plan highlights:

  • Vesting: You are always 100% vested in your own salary contributions. Employer-matched funds may follow a "vesting schedule," meaning you must work for the company for a specific period to keep 100% of those contributions.
     
  • Tax Benefits: Contributions are deducted from your payroll before federal income taxes are applied.
     
  • Withdrawals: Generally, withdrawals before age 59½ are subject to a 10% penalty plus income tax. However, under current SECURE Act 2.0 guidelines, there are now expanded exceptions for "emergency personal expenses" (up to $1,000 once per year).
     
  • Investment Choice: Employers provide a menu of options, typically consisting of mutual funds, target-date funds, or index funds.
     
  • Eligibility: Employers can require up to one year of service before you can join, but many now offer "auto-enrollment" immediately upon hire.
     
  • Loans & Hardships: While not federally required, most plans allow you to borrow from your 401(k) (usually up to 50% of the balance or $50,000) or take a hardship withdrawal for specific immediate financial needs.
Source: IRS.gov