Signing up for a 401(k) usually comes down to two blanks on a benefits form: what percent of each paycheck to put in, and whether to pick traditional or Roth.
If you've stared at those blanks and not known what to put, this guide walks through both. A 401(k) is a retirement account you get through your job, and money goes into it straight from each paycheck.
Those two blanks decide how much goes in, and whether you pay income tax on it now or when you take it out. The percent matters because your employer may also add money when you put money in.
Each plan sets many of its own rules, like the size of the match and when that money becomes yours, so keep your plan's documents handy. Below is how money gets into a 401(k), traditional vs Roth, how a match works on a $2,000 paycheck, the 2026 limits and what happens if you take money out early.
To understand the markets your 401(k) is invested in, join our free investor livestream on November 17, where CEO Jaspreet Singh shows how to use ChatGPT and Claude to research stocks like a pro.
Investing involves risk including loss, and past performance does not indicate future results.
How Does a 401(k) Work?
Here's how money gets into a 401(k) and what happens to it there. Money comes out of each paycheck and goes into an account in your name, and you choose how it's invested from the options your plan offers.
Many newer plans enroll eligible employees automatically, and those employees can opt out, according to IRS proposed rules on the new requirement. Ask your plan administrator how enrollment works at your job.
Traditional vs Roth 401(k)
The traditional-or-Roth choice on that form comes down to when you pay income tax, as the IRS describes:
| Traditional 401(k) | Roth 401(k) | |
|---|---|---|
| Money goes in | Before income tax | After income tax |
| Inside the account | Tax-deferred | No tax as it grows |
| Taking it out | Taxed as income | Tax-free if it's a qualified distribution |
A Roth withdrawal is tax-free only as a qualified distribution, which the IRS says generally means after five years in the plan and at or after age 59½. A traditional 401(k) isn't tax-free, it's tax-deferred, so the tax comes due when you take the money out.
Which one fits depends partly on what you expect your tax rate to be later, and nobody knows for certain what tax rates will look like in 20 or 30 years. Some people weigh paying the tax now against paying it later, and our guide to the Roth 401(k) goes deeper.
The Employer Match
Your own contribution isn't the only money that can go in. A match is money your employer adds under the plan's matching formula, usually based on your contributions. Some plans also match qualifying student-loan payments.
The IRS gives the example of an employer that adds 50 cents for each dollar you put in.
Your own contributions are always fully yours. Employer money can take years of work to become yours, which is called vesting, and the rules depend on the plan.
Here's how a match works on an example paycheck of $2,000 before taxes every two weeks (26 paychecks, $52,000 a year), in a plan where the employer adds 50 cents per dollar on up to 6 percent of pay:
| You put in | You, per paycheck | Employer, per paycheck | You, per year | Employer, per year |
|---|---|---|---|---|
| 6% of pay | $120 | $60 | $3,120 | $1,560 |
| 3% of pay | $60 | $30 | $1,560 | $780 |
The pay and the plan are examples, and match rules vary. Check your plan's match and vesting rules before you count on either.
How Much Can You Put in a 401(k) in 2026?
The IRS caps how much you can put in a 401(k) each year. For 2026, the employee contribution limit is $24,500, compared with $23,500 in 2025, according to the IRS announcement on November 13, 2025.
Workers 50 and older can generally add up to $8,000 more in catch-up contributions, or $11,250 instead at ages 60 to 63, in plans that allow it. A plan can also set a lower limit than the IRS, as the IRS contribution limits page notes, so check your plan documents for your number.
What's Inside a 401(k)?
Your 401(k) money goes into the investments you select or the plan's default option if you make no selection. Plans may offer stock and bond funds and cash-like options; check where your contributions are going. Investment values can go up or down.
You can only choose from what your plan offers. FINRA says 401(k)s carry fees, and your account statement and summary plan description show them.
Our guide to the expense ratio explains one common fund fee.
Investing involves risk including loss, and past performance does not indicate future results.
Can You Take Money Out of a 401(k) Early?
A 401(k) is built for retirement, so taking money out early costs extra. Money taken out before age 59½ generally owes an extra 10 percent tax unless an exception applies, according to the IRS, on top of any regular income tax owed.
Some plans allow loans, with limits the IRS sets and terms the plan sets, FINRA explains. Having cash savings outside the 401(k), like an emergency fund, means a car repair doesn't have to come out of your retirement account, and our guide on how big your emergency fund should be covers sizing one.
Where a 401(k) Fits the 15 Percent
The 75/15/10 split from the Climb to Wealth class is where a 401(k) comes in. The split puts at most 75 percent of take-home pay toward lifestyle, at least 15 percent invested and at least 10 percent saved.
A 401(k) is one place people put money toward investing, and our guide on how much of your paycheck to invest covers the 15 percent in more detail.
The class also teaches an order: save your first $2,000, pay off credit card debt in the right order, and automate the whole thing so you stop relying on willpower. A 401(k) contribution comes out of each paycheck automatically, which is one way that automate step can look.
Questions People Ask About 401(k)s
What happens to my 401(k) if I quit?
The money you put in stays yours, and employer money stays yours once it has vested. FINRA says you can roll it over into an IRA, and your plan's rules cover your other choices.
Is a 401(k) good or bad?
That depends on what you need, so here's what a 401(k) offers and what it limits:
- What it offers: Tax-deferred or Roth tax treatment, a possible employer match and contributions that come out of each paycheck automatically.
- What it limits: You can only invest in the options your plan offers, the IRS caps how much you can put in each year, early withdrawals generally owe an extra 10 percent tax and fees inside the plan reduce what you keep.
Before You Fill Out That Benefits Form
- A 401(k) moves part of each paycheck into your own retirement account, and your employer can add a match.
- Traditional money is taxed when you take it out, while qualified Roth withdrawals are tax-free.
- Check your plan's match, vesting rules, fees and limits, since each plan sets many of its own rules.
Pull up your last pay stub, find the 401(k) line and check what percent you put in and what your employer adds.
To keep learning how to manage your money beyond your plan, join our free investor livestream on November 17, where CEO Jaspreet Singh will research stocks live with ChatGPT and Claude.
