What Is a 401(k)?
A 401(k) is a tax-advantaged retirement savings plan offered by employers. You contribute a percentage of your paycheck before taxes are taken out — which lowers your taxable income today — and your money grows tax-deferred until you withdraw it in retirement.
Withdrawals in retirement are taxed as ordinary income. If you withdraw before age 59½, you'll owe income tax plus a 10% early withdrawal penalty in most cases. Roth 401(k)s work differently: contributions are after-tax, but qualified withdrawals in retirement are completely tax-free.
Why Employer Match Is So Valuable
If your employer offers a match, it's one of the best deals in personal finance. A common structure is 50% match on up to 6% of salary. If you earn $80,000 and contribute 6% ($4,800/year), your employer adds another $2,400 — an instant 50% return on your contribution before any investment gains.
Always contribute at least enough to capture the full match. Not doing so is leaving compensation on the table that's part of your total employment package.
2026 Contribution Limits
| Limit Type | 2026 Amount |
|---|---|
| Employee contribution | $24,500 |
| Catch-up (age 50–59 and 64+) | +$8,000 ($32,500 total) |
| Catch-up (age 60–63) | +$11,250 ($35,750 total) |
| Combined employee + employer | $72,000 |
These limits are indexed to inflation and typically increase slightly each year. The IRS announces the following year's limits in the fall; the 2026 limits came out on November 13, 2025.
What Rate of Return Should You Use?
The right rate depends on your investment mix. Common benchmarks:
- 100% stocks (S&P 500 index): ~10% nominal, ~7% after inflation, historically
- Mixes with bonds: lower returns and smaller swings, roughly in proportion to the bond share
Because this calculator works in today's dollars, enter a return after inflation. It uses a fixed rate — actual returns will vary year to year, sometimes dramatically. The longer your horizon, the more averages smooth out.
Traditional vs. Roth 401(k)
Many employers now offer both options:
- Traditional 401(k): Pre-tax contributions, taxed on withdrawal. Best if you expect to be in a lower tax bracket in retirement.
- Roth 401(k): After-tax contributions, tax-free withdrawals. Best if you expect to be in a higher bracket in retirement, or want tax diversification.
Both have the same contribution limits. Employer matches have traditionally gone into a pre-tax account even when you contribute to a Roth; since SECURE 2.0, plans may also let you take the match as Roth.
Starting in 2026, employees age 50+ whose prior-year FICA wages were above $150,000 must make their catch-up contributions on a Roth (after-tax) basis under SECURE 2.0 § 603, even if their regular deferrals are pre-tax. The $150,000 threshold is indexed for inflation in later years.
Frequently Asked Questions
How much should I contribute to my 401(k)?
At minimum, contribute enough to get your full employer match — that's a 50–100% instant return on your money. Beyond that, aim for 10–15% of gross salary total (including employer contributions). Max out if you can: the 2026 employee limit is $24,500 ($32,500 if age 50+).
What is employer matching and how does it work?
Employer matching is free money your company adds to your 401(k) when you contribute. A common match is 50% of your contributions up to 6% of salary — so if you earn $60,000 and contribute 6% ($3,600), your employer adds another $1,800. Always contribute at least enough to capture the full match.
What rate of return should I use for a 401(k)?
This calculator works in today's dollars, so use a return after inflation. A 100% stock portfolio (S&P 500 index fund) has historically returned about 10% a year before inflation, or about 7% after; a mix with bonds has returned less. Trying a lower and a higher rate, such as 4% and 7%, shows how much the result depends on it.
What are the 401(k) contribution limits for 2026?
For 2026, the employee contribution limit is $24,500. If you're age 50 or older, you can make an additional $8,000 catch-up contribution for a total of $32,500. If you're age 60–63, a higher catch-up of $11,250 applies ($35,750 total). The combined employee + employer limit is $72,000.
What happens to my 401(k) if I change jobs?
You have four options: leave it with your old employer (if allowed), roll it into your new employer's plan, roll it into an IRA, or cash it out (not recommended — you'll owe taxes and a 10% penalty). Rolling into an IRA gives you the most investment flexibility and keeps the money growing tax-deferred.
What is vesting?
Your own contributions are always 100% yours. Employer match may be subject to a vesting schedule — meaning you only "own" the match after working there for a certain number of years. If you leave before being fully vested, you may forfeit some or all of the employer match. Check your plan's vesting schedule before leaving a job.
Can I contribute to both a 401(k) and an IRA?
Yes. The contribution limits are separate. You can max out your 401(k) ($24,500 in 2026) and also contribute to a traditional or Roth IRA ($7,500 in 2026, or $8,600 if age 50+), subject to income limits for Roth IRA eligibility.