A 401(k) is the most commonly used employer retirement plan in the United States. Contributions reduce your taxable income today (traditional) or grow tax-free forever (Roth). The employer match is free money with no tax cost to you. And the 2026 limits are the highest they have ever been. If you are not maximizing your 401(k), you are leaving guaranteed return on the table.
Employee elective deferral: $23,500 (traditional + Roth combined)
Catch-up contribution (age 50-59 and 64+): Additional $7,500 = $31,000 total
Super catch-up (age 60-63 only - SECURE 2.0): Additional $11,250 = $34,750 total
Total including employer contributions (§415 limit): $70,000
Compensation cap for employer matching calculations: $350,000
Traditional 401(k) contributions are pre-tax - they reduce your W-2 gross income dollar for dollar. You pay ordinary income tax on distributions in retirement. Roth 401(k) contributions are after-tax - no current deduction, but qualified distributions in retirement are completely tax-free, including all the growth. Unlike Roth IRAs, Roth 401(k)s have no income limits - any employee can contribute regardless of salary.
The decision turns on your expected tax bracket comparison: if you expect to be in a higher bracket in retirement than today, Roth wins. If you expect a lower bracket in retirement, traditional wins. If you are uncertain - which is most people - splitting contributions between both hedges the bet.
Employer matching contributions are not subject to the $23,500 employee deferral limit - they count toward the $70,000 §415 total. A typical match is 50%-100% of employee contributions up to 3%-6% of salary. If your employer matches 50% of your contributions up to 6% of salary, contributing at least 6% earns you a guaranteed 50% return on that portion before any investment gain. No other investment offers a guaranteed 50% return. Contributing below the match threshold is the equivalent of a pay cut.
Distributions from a 401(k) before age 59½ are subject to a 10% early withdrawal penalty under IRC §72(t) in addition to ordinary income tax. At a 24% marginal rate, an early $10,000 withdrawal nets you roughly $6,600 after tax and penalty - a 34% haircut. Exceptions to the penalty exist for: separation from service at age 55 or older, substantially equal periodic payments (§72(t)(2)(A)(iv)), total and permanent disability, qualified domestic relations orders (QDRO), and certain medical expenses. The penalty is waived - not the income tax.
When you leave an employer, you can roll the 401(k) balance to an IRA or to a new employer's 401(k) with no tax consequence under IRC §402(c). A direct rollover - plan to plan or plan to IRA - avoids mandatory 20% withholding. An indirect rollover (check made out to you) requires you to deposit the full amount, including the 20% withheld, into the new account within 60 days to avoid treating the withheld portion as a taxable distribution. Direct rollovers are almost always the right mechanism.