401(k) Basics
A 401(k) is an employer-sponsored retirement account funded through payroll deferrals. Your contributions come out of each paycheck before federal income tax is applied, and the balance grows tax-deferred until you take withdrawals.
Three details shape almost everything else: how much you may defer each year, whether your employer adds matching dollars on top, and when that employer money actually becomes yours. This page covers each one in plain terms and points to the deeper pages.
Plan rules are written in your employer's plan document and vary from one workplace to the next. Annual contribution limits and catch-up amounts are published by the IRS and indexed for inflation. This material is educational only and is not financial advice. Investing involves risk, including possible loss of principal.
Plan Basics
A 401(k) is a retirement savings account offered through your employer. You decide how much of each paycheck to defer, and the money is invested for the years ahead.
Named after a section of the U.S. tax code, the plan lets you set aside part of your pay before federal income tax is withheld. That deferral lowers your taxable income for the year, and the balance grows tax-deferred until you take withdrawals in retirement.
Employers set the rules. Your plan document decides which funds are available, when you become eligible, and whether you can also contribute on a Roth basis, where the money goes in after tax.
Your plan document, not a summary of the tax code, is the final word on eligibility, matching, and vesting.
Plan documents and IRS guidance
Compare traditional and Roth contributions or check the 2025 contribution limits.
Contribution Types
Every dollar you defer lands in one of three buckets. The bucket decides when you pay income tax, not whether you pay it.
Pre-tax deferrals come out of your paycheck before federal income tax is withheld, so they lower your taxable wages for the year. You pay ordinary income tax when you withdraw the money in retirement. Withdrawals before age 59½ generally trigger a 10% additional tax unless an exception applies.
Roth deferrals are withheld after income tax, so they do not reduce this year's taxable income. Qualified withdrawals in retirement come out tax free. That makes Roth dollars most valuable if you expect higher tax rates later, or if you want tax diversity in retirement.
After-tax contributions are neither pre-tax nor Roth. They are made with money that has already been taxed, and earnings grow tax deferred until withdrawal. Some plans allow them so you can keep saving toward the total annual additions limit after you max out your elective deferrals.
| Type | Tax treatment now | Tax treatment at withdrawal | 2025 limit |
|---|---|---|---|
| Pre-tax | Reduces taxable income | Taxed as ordinary income | $23,500 |
| Roth | No deduction | Tax free if qualified | $23,500 |
| After-tax | No deduction | Earnings taxed as ordinary income | Plan and total limit |
The $23,500 figure is the 2025 elective deferral limit. Participants 50 and older may add a $7,500 catch-up contribution. Employer match and after-tax amounts fall under a separate total annual additions limit. Not every plan offers all three types, so confirm your plan document. See how contribution limits and catch-up amounts work.
Plan Basics
Your own salary deferrals are always fully vested. Employer contributions, including matching and profit-sharing dollars, may follow a vesting schedule written into your plan document.
Vesting measures the years of service you need before employer contributions belong to you permanently. Until you reach a vesting milestone, that money sits in your account but can be forfeited if you leave the employer.
A three-year cliff vests nothing until you complete three years of service, then vests everything at once. A six-year graded schedule adds a set share each year, often 20 percent annually, until you are fully vested.
Most plans count hours or months of service, and some restore earlier service if you return within a set period. Read the rehire language in your plan before assuming a break costs you credit.
Matching contributions may not vest more slowly than a three-year cliff or a six-year graded schedule, and safe harbor matches vest immediately. See how vesting interacts with matching dollars in the employer match guide, or review contribution limits before you change your deferral rate. This page is educational and is not financial advice.