401(k) Plan
What it is
A 401(k) is a US employer-sponsored retirement plan. Employees can contribute a portion of each paycheck on a pre-tax (Traditional) or after-tax (Roth) basis; many employers add a match on top. The contribution limit is much higher than an IRA — $23,500 in 2025, with a $7,500 catch-up for those 50+ (and an enhanced $11,250 catch-up for those 60–63 under SECURE 2.0).
The 401(k) is a wrapper, but the investment menu is set by the employer's plan administrator. Holdings are typically a curated list of mutual funds (sometimes target-date funds and a brokerage window).
Who can open one
Employees of a company that offers a 401(k) plan. Self-employed individuals can open a Solo 401(k). Eligibility rules (e.g., minimum service period) are set by the plan; under SECURE 2.0, long-term part-time employees (≥500 hours/year for 2 consecutive years) must be allowed to contribute.
How contributions work
Contributions are deducted directly from payroll. The 2025 employee contribution limit is $23,500 ($31,000 if 50+; $34,750 if 60–63). The total combined employer + employee limit is $70,000 in 2025.
Most plans offer two contribution buckets: Traditional (pre-tax, reduces current-year taxable income) and Roth (after-tax, no current-year deduction). The employee can usually split contributions between the two. Employer match dollars are always pre-tax, regardless of how the employee contributes.
If contributions exceed the limit (often a problem when changing jobs mid-year), the excess must be withdrawn before April 15 of the following year, or it's taxed twice — once when contributed and again when withdrawn.
Tax treatment
Traditional 401(k): contributions reduce current-year taxable income; growth is tax-deferred; withdrawals are taxed as ordinary income.
Roth 401(k): contributions don't reduce current-year taxable income; growth is tax-free; qualified withdrawals (after age 59½ + 5 tax years) are tax-free.
Employer match: always pre-tax, regardless of whether the employee contributes Traditional or Roth. Match dollars vest on the employer's schedule — until vesting, they belong to the employer if the employee leaves.
Required Minimum Distributions begin at age 73 (75 for those born in 1960+). Roth 401(k) RMDs were eliminated for the original owner under SECURE 2.0, starting in 2024.
How withdrawals work
Withdrawals before age 59½ are subject to ordinary income tax plus a 10% early-withdrawal penalty unless an exception applies. One 401(k)-specific exception: separation from service in the year the employee turns 55 or later allows penalty-free withdrawal from that employer's 401(k) (Rule of 55).
Many plans offer loans against the 401(k) balance — typically up to 50% of vested balance or $50,000, whichever is less, with interest paid back to the holder's own account. A loan default (e.g., leaving the employer with an outstanding balance) converts the loan to a taxable distribution.
When leaving an employer, the 401(k) can be rolled over to an IRA, rolled into the new employer's 401(k), left with the old employer (if balance allows), or cashed out (taxed + penalized if pre-59½).