A 401(k) plan is an investment account offered by your employer that allows you to save for retirement. If your company offers a 401(k) plan, it may have certain eligibility requirements. While these requirements vary by company, some employees may be excluded from participating if you they are not at least 21 years of age or have not completed a year of service with the company.
If you’re considering a job offer, be sure to ask about the company’s retirement plan, including any waiting period.
How much can I contribute to a 401(k) plan?
401(k) plan accounts have higher contribution limits than individual retirement accounts (IRAs). As of 2024 you are able to set aside up to $23,000 across your 401(k) plan accounts.
To boost your contributions even further, you might consider catch-up contributions. If you are 50 or older, you can contribute an extra $7,500 (up to $30,500 total in 2024) to your 401(k) account. This increased limit can help boost your savings as you near the retirement finish line. But you don’t actually have to be “behind” in your savings to take advantage of catch-up contributions.
What is the difference between a traditional and Roth 401(k) plan?
There are two common kinds of 401(k) plans: traditional and Roth. These plans have some similarities: They are subject to the same annual contribution limit and may offer the same investment options. However, traditional and Roth 401(k) plans differ in terms of the tax benefits they offer.
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Traditional
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Roth
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Contributions
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Made on a pre-tax basis
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Made on an after-tax basis
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Withdrawals
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Subject to income tax
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Tax-free after age 59 ½*
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A traditional 401(k) plan is sometimes referred to as a pre-tax 401(k) plan. You contribute to the plan with before-tax dollars. Because you don’t pay taxes on the money you put into the plan, you must pay taxes (both federal and most state income taxes) when you withdraw it. This structure could be an advantage if you’re in a high tax bracket today but expect to be in a lower one when retired.
With a Roth 401(k) plan, the opposite is true. You save after-tax dollars in the account. Because you’ve already paid taxes on what you’re saving, your withdrawals are considered qualified distributions and won’t be taxed as long as you meet both of the following criteria:
- You’ve had the account for at least five years.
- You begin to make withdrawals either after you’ve turned 59½ or due to disability.
How does 401(k) plan matching work?
One major benefit of 401(k) plans is that employers often contribute to your account and “match” what you save. Each employer has its own methods and rules for how it makes matching 401(k) plan contributions. Importantly, a match does not necessarily mean that an employer matches your contributions dollar for dollar. Instead, employers typically match up to a certain percentage of your salary or your contribution. For instance, the average employer 401(k) match is 4.6% of an employee’s salary, according to the 2024 How America Saves Report.
If your company offers a match, be sure to consider taking advantage of this benefit. It could be a simple and effective way to boost your retirement savings.
One important note: Employers often require you to wait for a certain amount of time before their contributions to your account “vest,” meaning they become yours to keep. Consider this provision before changing jobs so that you don’t inadvertently miss out on extra savings for your retirement.
When can I withdraw from my 401(k) plan?
You can start to withdraw your savings penalty-free when you reach age 59 ½. Taking out your savings before that time could cost you an extra 10% on top of what you’d normally pay in state and federal taxes.
When it’s time to start using your savings, be sure to consider the tax implications. In addition, once you turn 72, you typically have to withdraw a minimum amount annually to comply with distribution requirements.
401(k) plans can be very useful tools in saving for retirement, particularly if you take advantage of features that your plan may offer to help maximize your savings. And the sooner you start saving in your 401(k) plan, the longer any investment earnings have to produce earnings of their own.
