What is 401(k)?

A 401(k) is a US employer-sponsored retirement account that lets employees contribute a portion of pre-tax (Traditional) or after-tax (Roth) salary, typically with an employer matching contribution, growing tax-deferred or tax-free until retirement.

2026 contribution limits are USD 24,000 ('elective deferral') plus USD 8,000 catch-up at 50+. Combined employer + employee limit is around USD 71,000. Most plans match 50–100% of employee contributions up to 3–6% of salary — always capture the full match before contributing elsewhere.

Withdrawals before 59½ incur a 10% penalty plus income tax (except hardship or 55-and-separated rule). At 73, required minimum distributions begin. Rolling over to an IRA on job change preserves the tax shelter and usually broadens investment choice.

Example

An employee earning USD 100,000 contributes 10% (USD 10,000) and receives a 5% employer match (USD 5,000); USD 15,000 enters the 401(k) each year, growing tax-deferred until retirement.

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Related terms

Roth IRA

A Roth IRA is a US individual retirement account funded with after-tax dollars, in which contributions and earnings grow tax-free and qualified withdrawals in retirement are entirely tax-free.

Retirement Planning

Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve them — covering savings, investments, insurance, taxes and withdrawal strategy.

Annuity

An annuity is an insurance contract in which the buyer pays a premium (lump sum or instalments) and the insurer pays a series of guaranteed periodic payments — for a fixed period or for life — typically used for retirement income.

Social Security

Social Security in the US (AHV/AVS in Switzerland, NI in the UK) is a government-run social-insurance programme that provides retirement, disability and survivor benefits to qualifying workers and their families, funded through payroll taxes.

Frequently asked questions

Should I max out the 401(k)?+

Always at least to the employer match; max if budget allows and tax deferral makes sense.

Roth or Traditional 401(k)?+

Same logic as IRA — Roth for younger or lower-bracket employees, Traditional for high-earners expecting lower retirement rates.

What happens when I change jobs?+

Roll over to a new 401(k) or to an IRA to keep the tax shelter; cashing out triggers tax and a 10% penalty.