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Benefits

What Is a 401(k)? Complete Guide to Retirement Savings

A 401(k) is an employer-sponsored retirement savings plan that lets you contribute pre-tax (or Roth after-tax) dollars from your paycheck. Your money grows tax-deferred, and many employers match a portion of your contributions — essentially free money. In 2024, you can contribute up to $23,000 ($30,500 if 50+).

2024 401(k) Contribution Limits

Who2024 Limit
Employee contribution (under 50)$23,000
Catch-up contribution (age 50+)+$7,500
Total employee limit (50+)$30,500
Combined employee + employer limit$69,000
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Employer Match: Free Money

Many employers match 50%–100% of your contributions up to a percentage of your salary. This is an immediate 50%–100% return on your investment — always contribute at least enough to get the full match.

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Example: Don't leave free money behind

Your employer matches 50% of contributions up to 6% of salary. You earn $60,000/year. If you contribute 6% ($3,600), your employer adds $1,800/year — completely free. That's $150/month you'd forfeit by not contributing.

Traditional vs. Roth 401(k)

  • Contributions: Pre-tax (reduces taxable income now)
  • Growth: Tax-deferred
  • Withdrawals: Taxed as ordinary income
  • Required Minimum Distributions: Yes, starting at age 73
  • Best for: Higher earners expecting lower tax rate in retirement
  • Contributions: After-tax (no immediate tax break)
  • Growth: Tax-free
  • Withdrawals: Tax-free in retirement
  • Required Minimum Distributions: No RMDs starting 2024
  • Best for: Younger workers or those expecting higher taxes in retirement

General guideline: Choose Traditional if you're in a high tax bracket now and expect a lower rate in retirement. Choose Roth if you're early in your career, expect income to grow, or want tax-free flexibility in retirement.

Many plans allow splitting contributions between both. You can also contribute to both a 401(k) and an IRA in the same year.

Vesting: When Employer Contributions Become Yours

Your own contributions are always 100% yours. Employer matching contributions vest on a schedule:

  • Immediate vesting: Employer match is yours from day one
  • Cliff vesting: 0% until a date (e.g., year 3), then 100%
  • Graded vesting: Gradual (e.g., 20%/year over 5 years)
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Early Withdrawal Penalty

Withdrawing from a 401(k) before age 59½ triggers a 10% penalty plus income tax on the amount withdrawn. Exceptions exist for disability, certain medical expenses, and a few other situations.