401(k) basics: contributions, employer match and Roth choices

THE MAIN IDEA

A 401(k) is a retirement account through work. Understand the match, taxes, investments and withdrawal rules—not just the contribution percentage.

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Your contribution + employer contributionHypothetical match: 50% of your contributions up to 6% of $60,000 pay

You contribute 6%$3,600

Employer adds 3%$1,800

Total contributed$5,400

Your plan’s actual formula and vesting rules determine the employer benefit. This example excludes investment gains, losses and fees.

1. Know what the account does

You contribute part of your wages to a workplace retirement plan. The account holds investments offered by the plan. Contributing and selecting investments are separate decisions: review where new contributions go rather than assuming the account earns a fixed rate.

2. Read the employer match formula

Some employers contribute when you do. Ask for the exact formula, eligible pay definition and contribution timing. In the example below, the employer matches half of what you put in, up to your contributions of 6% of pay. That produces a maximum match of 3% of pay—not 6%.

3. Check vesting

Your own employee contributions are always yours. Ownership of employer contributions can depend on the plan’s vesting schedule. If you are considering a job change, ask how much of the employer money is vested and when the rest becomes yours.

4. Compare traditional and Roth

Traditional pre-tax contributions generally reduce current federal taxable income; distributions are generally taxable. Roth contributions use after-tax money; qualified withdrawals are tax-free. A Roth 401(k) is not the same account as a Roth IRA. Compare the tax treatment and plan rules, and avoid assuming either choice is best for everyone.

5. Understand limits and investment costs

Annual IRS contribution limits can change, and catch-up rules depend on age and eligibility. Check the current IRS limit and your plan before increasing payroll deductions. Review investment options, diversification, expense ratios and other plan fees. A 401(k) is an account type, not a promise of returns.

6. Plan before withdrawing or changing jobs

Distributions before age 59½ may face income tax and an additional 10% tax unless an exception applies. Moving money between accounts can have tax consequences if handled incorrectly. Ask the plan administrator about rollover options and get tax guidance before withdrawing.

SEE THE NUMBERS

A worked planning example

A worked planning example
Example at $60,000 annual pay	Annual contribution
You contribute 6%	$3,600
Employer matches 50% of that contribution	$1,800
Total before investment gains or losses	$5,400

Hypothetical match formula, not a universal benefit. This uses eligible annual pay of $60,000, assumes the full match is earned and ignores fees and investment changes. Vesting can affect what employer money you keep.

Key terms, in plain English

Match: An employer contribution determined by the plan’s formula.
Vesting: How much of the employer contribution you own.
Traditional 401(k): A workplace account with pre-tax contributions and generally taxable distributions.
Roth 401(k): A workplace account with after-tax contributions and tax-free qualified withdrawals.
Expense ratio: An ongoing fund cost expressed as a percentage of assets.

Common mistakes to avoid

Treating a projected balance as guaranteed.
Leaving fees, taxes or inflation out of the plan.
Choosing an account without checking when you can access the money.

Questions to ask

Bring these to your lender, agent or housing counselor, as appropriate.

What assumptions am I using, and how would a worse outcome change the plan?
Which costs and tax rules apply to this account?
How much cash will I need before retirement accounts are available?

Common questions

Do all employers match?

No. The plan decides whether there is a match and how it works. Read the plan documents or ask the administrator.

Does a contribution automatically choose investments?

The plan may use a default investment, but check your account and allocation. Review its risks and fees.

Can I use a 401(k) as emergency savings?

It is designed for retirement. Withdrawal and loan rules can restrict access or create costs. Build accessible savings separately.

Your next steps

Write down your goal and timeline.
Use the linked calculator with more than one assumption.
Review costs, taxes and access rules before making changes.

Sources and further reading

Official resources checked October 12, 2026. Loan and program rules can change. Confirm the requirements for your own purchase.

Educational information and planning examples; not a loan offer or personalized financial advice.