401(k) basics: the workplace retirement account

A common starting point is contributing at least enough to capture your full employer match — that's effectively free money. Many financial frameworks suggest aiming for 10-15% of pre-tax income across all retirement accounts, but the right number depends on income, expenses, and time horizon. Starting somewhere is more important than starting at the perfect number.

For 2026, the 401(k) employee contribution limit is $24,000 (or $32,000 if you're 50 or older with the catch-up). The combined employer + employee total limit is around $74,000. These limits are adjusted annually for inflation by the IRS.

You generally have four options: leave it with your old employer's plan (if balance allows), roll it into your new employer's 401(k), roll it into an IRA, or cash it out (rarely the right move — it triggers taxes and a 10% early-withdrawal penalty if under 59½). Rolling to an IRA usually gives you the most investment options and lowest fees.

The same logic as Roth vs Traditional IRA applies: Roth makes sense if you expect a higher tax rate in retirement, Traditional if you expect a lower one. Many savers split the difference between both within their 401(k) plan to hedge. Most plans offer both options now, though employer matches typically go into the Traditional bucket regardless.

Vesting determines when your employer's matching contributions actually become yours. Some employers offer immediate vesting; others require 3-6 years of service before the match is fully yours. Your own contributions are always 100% vested immediately. Always check your plan document — leaving before fully vested can mean leaving real money behind.