Workplace retirement plans

Your 401(k), Explained

Understand contributions, employer matching, and account management before you make your next election.

Educational resource only. Not financial advice.

Start with the basics
Plan participant reviewing a 401(k) statement and contribution options at a desk
Reviewing a plan statement against the employer match formula.

Figures reflect IRS cost-of-living adjustments for the 2025 tax year.

Plan Basics

What a 401(k) actually is

A 401(k) is a retirement account your employer sponsors. You choose how much of each paycheck to defer, and that money is invested for the long term under rules your plan document sets.

Two features do most of the work. First, contributions come out of your pay before federal income tax is calculated, so a traditional 401(k) lowers taxable wages today while the balance grows until you withdraw it. Second, many employers add their own contribution on top of yours, which is money you would not receive in a paycheck.

Everything else is plan-specific. Eligibility waiting periods, vesting schedules, investment menus, loan provisions, and fees are written by your employer, not by the IRS. Two coworkers at different companies can have the same salary and the same deferral percentage and still see very different outcomes.

  1. 1

    You defer

    A percentage or flat amount leaves each paycheck and lands in your account.

  2. 2

    Your employer may add

    If a match exists, it follows the formula in your plan document.

  3. 3

    The balance invests

    Growth is tax-deferred until you take a distribution.

Educational content only. This is not financial advice, and investing involves risk, including possible loss of principal.

Contribution Options

Traditional and Roth deferrals, side by side

Both come out of your paycheck and share one annual employee limit. What changes is when the tax bill arrives.

Traditional vs Roth 401(k)

FeatureTraditionalRoth
Money goes inPre-tax dollarsAfter-tax dollars
Taxable income todayReducedUnchanged
Withdrawals in retirementTaxed as ordinary incomeTax free when qualified
Income limitsNoneNone inside a 401(k)
Required distributionsBegin at age 73Roth balances excluded

Employee deferrals are capped at $23,500 for 2025. Savers 50 and older may add a $7,500 catch-up, and those aged 60 through 64 may add $11,250, per IRS Notice 2024-80. Your plan may cap deferrals at a lower share of pay.

  • Roth means paying tax now to buy tax-free income later. Traditional does the reverse.
  • Employer match dollars usually land pre-tax, whichever option you pick.
  • Many plans let you split deferrals between both options in the same year.

Compare traditional and Roth in more detailCheck the 2025 contribution limits

Employer Match

Your employer may add to what you save

A match is the portion your employer contributes when you put your own money into the plan. It is not automatic in every plan, so read your plan documents before you set a deferral rate.

Read the formula in two steps

Most policies read like "50% of the first 6% of pay." Split that into the portion, 50 cents per dollar you defer, and the ceiling, where only the first 6% of pay counts. Dollars you save above the ceiling earn nothing extra.

Example plan: $70,000 salary, 50% match on the first 6% of pay
Your deferralYou contributeEmployer addsTotal invested
3% of pay2,1001,0503,150
6% of pay4,2002,1006,300
10% of pay7,0002,1009,100
Maximum match2,100 per year, reached once you defer 6% of pay

Two details decide how much you keep. A vesting schedule can require a set number of years of service before matched dollars are fully yours, and some plans true up at year end if your deferrals are uneven across pay periods. Your summary plan description states both.

Run your own numbers in the match calculator

Account Management

Five steps for managing your 401(k)

Your employer sponsors the plan and sets the fund menu, but the day-to-day choices stay with you. Work through these five steps once a year, then repeat them after any change in pay, job status, or family.

  1. Confirm enrollment and beneficiaries

    Sign in to the plan recordkeeper and check that your deferrals are active. Name a primary and a contingent beneficiary, then update both after a marriage, birth, or divorce.

  2. Set your deferral percentage

    Elect a percentage of each paycheck rather than a flat dollar amount, so savings scale with raises. Changes usually take effect within one or two pay periods.

  3. Choose investments and review fees

    Compare the funds available in your plan, starting with expense ratios and target-date options. Small fee differences compound over a full career, so check them before you set and forget.

  4. Rebalance once a year

    Markets move your mix away from its target. Rebalancing realigns the holdings back to the allocation you chose, which keeps your risk level where you intended.

  5. Read statements, vesting, and loan rules

    Review each statement for errors and track how much employer money is vested in your name. Before borrowing or withdrawing, compare the plan rules with the tax consequences.

Plan rules differ by employer. Compare the current contribution limits, see how your employer match is calculated, and read your vesting schedule before changing any election.

Educational information only. This is not financial, tax, or investment advice, and investing involves risk, including possible loss of principal.

Projection calculator

See how steady contributions could add up

Adjust the sliders to model a hypothetical account balance over time. The estimate assumes a 6% average annual return with monthly compounding. This is educational only, not financial advice, and investing involves risk.

$25,000
$500
50%
25 years
Projected balance $0
Your contributions$0
Employer match$0
Investment growth$0
Year 1Retirement

The match rate applies to every dollar you contribute, up to your employer's plan formula. Review employer match basics.

Contact

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Send a question about 401(k) plan basics, contribution options, employer matching, or account management. We answer with general educational information.

We reply within two business days. Replies are educational only and are not personalized investment advice; investing involves risk.