What Is a 401(k)? How the Most Common Workplace Retirement Plan Works

A 401(k) is a retirement savings plan offered through an employer. You contribute part of your paycheck, the money is invested, and it grows with tax advantages until retirement, according to the IRS.

How do contributions work?

You choose a percentage of your pay to contribute, and it comes out of your paycheck automatically. In a traditional 401(k), contributions are pre-tax, which lowers your taxable income now; you pay tax when you withdraw in retirement. Many employers also offer a Roth 401(k) option, where contributions are after-tax and qualified withdrawals are tax-free.

What is an employer match?

Many employers match part of what you contribute, for example 50 cents per dollar up to a set percentage of your pay. A match is additional compensation, so contributing at least enough to get the full match is widely treated as the first priority in retirement saving.

What are the 2026 limits?

The IRS raised the 401(k) contribution limit to $24,500 for 2026, up from $23,500 in 2025. If you are 50 or older, you can add an $8,000 catch-up contribution, for $32,500 total. Under SECURE 2.0, workers aged 60 to 63 get an even higher catch-up limit of $11,250 in 2026.

Frequently asked questions

What happens to my 401(k) if I change jobs? You can typically leave it with the old employer's plan, roll it into your new employer's plan, or roll it into an IRA. Cashing out early generally means taxes plus a 10% additional tax if you are under 59 and a half.

Is a 401(k) the same as investing in a brokerage account? No. A 401(k) is a retirement account with tax advantages and contribution limits, usually offering a menu of funds. A standard brokerage account has no contribution limits or early-withdrawal penalties, but no special tax treatment either.

Sources and further reading: IRS, "401(k) Plans" (https://www.irs.gov/retirement-plans/401k-plans); IRS, "401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500" (https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500).