What is 401(k)?

A 401(k) is a tax-advantaged retirement account offered by your employer. You contribute a portion of your paycheck, often with an employer match. Governed by Section 401(k) of the Internal Revenue Code and regulated under the Employee Retirement Income Security Act (ERISA) of 1974, it allows employees to make salary-deferral contributions. In a traditional 401(k), contributions are made pre-tax, which reduces the employee's current taxable income, while account growth is tax-deferred until distributions are taken in retirement.

Employers frequently incentivize participation by offering matching contributions. The IRS adjusts the elective deferral limits annually for inflation. For the 2026 tax year, the elective deferral limit is $24,500 ($23,500 for 2025). Participants aged 50 and older can make additional catch-up contributions of $8,000 in 2026 ($7,500 in 2025). Under the SECURE 2.0 Act, a higher catch-up limit of $11,250 applies to employees aged 60 to 63 in 2025 and 2026.

Withdrawals made before age 59½ are generally subject to ordinary income tax and a 10% early withdrawal penalty, unless a statutory exception applies. Plans must also adhere to non-discrimination testing rules to ensure benefits do not disproportionately favor highly compensated employees.