What Is a 401(k)? Contributions, Matching and Withdrawals Explained

A 401(k) is the retirement plan most American workers meet first. It is offered through an employer, it comes out of your pay, and it can grow for decades before you touch it. Yet many people who have one are unsure how much they can put in, what the employer match is, whether to choose the traditional or Roth version, or what happens if they leave their job or need the money early. This guide explains it in plain language, using the 2026 limits published by the Internal Revenue Service (IRS). It is educational information only, not personal financial advice.

What a 401(k) is

A 401(k) is a qualified employer-sponsored retirement plan. The IRS describes it as a plan under which an employee can elect to have the employer contribute a portion of their cash wages to the plan on a pre-tax basis. In a traditional 401(k), those deferred wages — called elective deferrals — are generally not subject to federal income tax withholding when deferred. They are still included as wages for Social Security, Medicare and federal unemployment taxes.

The money is invested, usually in a menu of funds chosen by the plan, and the gains are not taxed until they are distributed — tax-deferred contributions and tax-deferred growth. A traditional 401(k) is the most common type.

How much you can contribute in 2026

The IRS sets the limits each year, adjusting them for inflation. The 2026 figures were announced in IRS news release IR-2025-111 on November 13, 2025, with the technical detail in Notice 2025-67. For 2026, the employee elective deferral limit is $24,500, up from $23,500 in 2025 — the most you can contribute from your own pay into a 401(k), 403(b), governmental 457 plan or the federal Thrift Savings Plan. The limit covers traditional and Roth contributions combined: splitting your money between the two does not give you extra room.

Workers aged 50 and over can contribute more. The catch-up limit for 2026 is $8,000, up from $7,500 in 2025, so a participant aged 50 or older can generally contribute up to $32,500 in total. There is also a higher catch-up for workers who turn 60, 61, 62 or 63 during the year, introduced by the SECURE 2.0 Act of 2022. For 2026, that higher catch-up remains $11,250 instead of $8,000, giving a total of $35,750 — it replaces the $8,000, and is not added on top of it.

There is a second, higher ceiling. The total annual additions limit for 2026 is $72,000 — your elective deferrals plus your employer’s matching and other employer contributions combined. Your employer’s match does not count against your personal $24,500 limit; it fits into the larger $72,000 total instead.

Traditional vs. Roth 401(k)

The difference is entirely about when tax is paid. With a traditional 401(k), contributions are pre-tax: they reduce your taxable income in the year you contribute, the money grows tax-deferred, and you pay ordinary income tax on withdrawals in retirement — suiting a worker who expects a lower bracket in retirement. With a Roth 401(k), contributions are after tax, the money grows tax-free, and qualified withdrawals in retirement are tax-free — suiting a worker who expects a higher bracket later, or is early in their career in a low bracket. Many workers split contributions between the two, remembering that the $24,500 limit applies to the combined total.

The new Roth catch-up rule for 2026

The biggest change for 2026 affects higher earners aged 50 and over. Under Section 603 of the SECURE 2.0 Act, catch-up contributions must be made as Roth (after-tax) contributions if the participant’s prior-year FICA wages from the employer sponsoring the plan exceeded $150,000. For 2026 contributions, the test looks at 2025 wages — generally the Social Security wages shown in Box 3 of your W-2. The $150,000 threshold is confirmed for 2026 in IRS Notice 2025-67, which raised it from the $145,000 figure in the original statute. The rule was scheduled for 2024, but the IRS granted a transition period, and it applies from January 1, 2026; final regulations were issued on September 16, 2025.

Three points matter. First, the rule applies only to the catch-up portion: regular deferrals up to $24,500 can still be pre-tax. Second, the test is per employer, not total income. Third, if your plan has no Roth feature and you are above the threshold, you generally cannot make catch-up contributions at all until the plan adds one. If your 2025 wages from the plan sponsor were $150,000 or less, nothing changes.

Employer matching and vesting

Many employers add their own money. The most common form is a matching contribution, based on how much you contribute — the IRS gives the example of 50 cents for each dollar an employee defers. Some employers also make profit-sharing contributions. The exact formula is set by each employer, so there is no single standard match, and it counts toward the $72,000 total rather than your $24,500 deferral limit.

The match comes with a condition called vesting. Your own elective deferrals are always 100% vested — they belong to you from day one. Employer contributions may be subject to a vesting schedule. Under cliff vesting, you own none until you complete three years of service, then you become 100% vested all at once. Under graded vesting, you vest 20% after two years, then an additional 20% each year until 100% after six years. Safe harbor and SIMPLE 401(k) plans are exceptions: their employer contributions are fully vested when made. If you leave before you are fully vested, you forfeit the unvested portion — at 60% vested, you keep 60% of the match and forfeit 40%.

What happens when you change jobs

A 401(k) does not automatically follow you from job to job. The account stays with your former employer’s plan until you take action. You generally have four options: leave the money where it is, roll it into your new employer’s plan, transfer it to an Individual Retirement Account (IRA), or cash it out. Cashing out is usually the most expensive option, because it triggers income tax and, if you are under 59½, the 10% early withdrawal penalty described below. A direct rollover moves the funds between retirement accounts without the money passing through your hands, so it is not treated as taxable income. Your new employer’s plan is not required to accept incoming rollovers, so check first, and only vested amounts can be rolled over. If your vested balance is $7,000 or less, an employer can force you out without your consent under SECURE 2.0, and balances between $1,000 and $7,000 must generally be rolled into a safe harbor IRA on your behalf unless you direct otherwise.

See the investments a 401(k) typically holds: What Is an ETF? Exchange-Traded Funds Explained.

Withdrawing money: the 59½ rule and the 10% penalty

The 401(k) is designed for retirement, and the tax code discourages early use. Withdrawals before age 59½ are generally treated as early distributions: you owe ordinary income tax on the pre-tax amount, plus a 10% additional tax, unless an exception applies. The exceptions waive the penalty only — income tax is still owed in most cases.

The IRS exceptions for a 401(k) include: separation from service at 55 or later — the “Rule of 55”, only for that employer’s plan (50 for certain public safety employees); total and permanent disability, and terminal illness certified by a physician; death; substantially equal periodic payments, for at least five years or until 59½, whichever is longer; unreimbursed medical expenses above 7.5% of adjusted gross income; birth or adoption, up to $5,000 per child; a federally declared disaster, up to $22,000; domestic abuse, up to the lesser of $10,000 or 50% of the account; an emergency personal expense, one a year up to the lesser of $1,000 or the vested balance over $1,000; an IRS levy; and distributions under a Qualified Domestic Relations Order.

Two misunderstandings are worth correcting. First, a hardship withdrawal is not the same as a penalty-free withdrawal: a plan may allow hardship distributions for an immediate and heavy financial need, but they are still taxable and may still attract the 10% tax. Second, qualified higher education expenses and a first-time home purchase of up to $10,000 apply to IRAs only, not to 401(k) plans. Once you reach 59½, withdrawals are penalty-free, though pre-tax money is still taxed as ordinary income.

401(k) vs. IRA in one paragraph

A 401(k) is an employer plan with a much higher limit — $24,500 for 2026, against $7,500 for an IRA — and it can include an employer match, which an IRA never does. An IRA is an individual account you open yourself, with a wider choice of investments, but the lower limit and no match mean it is usually a supplement to a workplace plan rather than a replacement. Both come in traditional and Roth forms, and the limits are independent: contributing to a 401(k) does not reduce how much you can put into an IRA, although income limits can restrict a traditional IRA deduction or Roth IRA eligibility. For 2026, the Roth IRA phase-out range is $153,000 to $168,000 for single filers, and $242,000 to $252,000 for married couples filing jointly, according to the IRS.

Inflation works against every saver — our explainer shows how the official measure works: Inflation Explained: What CPI Means in 2026. Before the year ends, check your contribution rate against the $24,500 limit, whether you are getting the full employer match, and your vested balance.

Sources

IRS, “401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500” (IR-2025-111, November 13, 2025): https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
IRS, “401(k) Resource Guide for Plan Participants — 401(k) Plan Overview”: https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-401k-plan-overview
IRS, “Retirement Topics — Exceptions to Tax on Early Distributions”: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions
SECURE 2.0 Section 603 Roth catch-up rule, $150,000 threshold for 2026: https://legalclarity.org/secure-2-0-section-603-the-mandatory-roth-catch-up/
401(k) vesting schedules and $7,000 force-out threshold: https://legalclarity.org/does-your-401k-follow-you-from-job-to-job/