If your first US job offers a 401(k), it may be one of the most valuable benefits you receive. A 401(k) is a workplace retirement account that lets you invest from your paycheck with tax advantages, and many employers add free money through matching contributions.
How a 401(k) works
- You choose a percentage of your pay to contribute.
- Contributions come out of each paycheck automatically.
- Your employer may add a match.
- The money is invested in funds you choose and grows over time.
Employer matching: do not leave it on the table
A common match is something like 50% of your contributions up to 6% of salary, or 100% up to 3% or 4%. If you earn $50,000 and your employer matches 100% up to 4%, contributing $2,000 gets you another $2,000. That is an instant 100% return. Contribute at least enough to get the full match if you possibly can.
Traditional vs Roth 401(k)
| Traditional 401(k) | Roth 401(k) | |
|---|---|---|
| Taxes on contributions | Pre-tax, lowers taxable income now | After-tax |
| Withdrawals in retirement | Taxed as income | Tax-free if qualified |
| Good for | Higher current tax brackets | Lower brackets early in your career |
Contribution limits
The IRS sets annual limits on employee contributions, with additional catch-up amounts for older workers. Employer contributions have a separate, higher combined limit. Check the current figures on the IRS website each year.
Vesting
Your own contributions are always yours. Employer contributions may vest over time, for example 25% per year over four years. If you leave before you are fully vested, you may lose part of the match. Check your plan’s vesting schedule.
What to invest in
Many plans default to a target-date fund, which is a reasonable choice for most beginners. Otherwise, look for low-cost index funds and avoid high-fee options. See long-term growth with our Compound Interest Calculator and early retirement scenarios with our FIRE Calculator.
When you change jobs
- Leave the money in the old plan if it has good, low-cost funds.
- Roll it into your new employer’s plan.
- Roll it into an IRA for more investment choice.
- Avoid cashing out, which can trigger taxes and penalties.
Equivalents outside the US
UK workers are auto-enrolled in workplace pensions with employer contributions. Canadians may have group RRSPs with matching. Nigerian employees contribute to Retirement Savings Accounts under the Contributory Pension Scheme, with employer contributions.
Fit your contributions into your monthly plan with our Budget Calculator.
Common 401(k) mistakes to avoid
A 401(k) is powerful, but small mistakes can cost thousands over a career:
- Not contributing enough for the full match.
- Leaving the default contribution too low, such as 3%, for years.
- Choosing high-fee funds when low-cost index options exist.
- Cashing out when changing jobs, triggering tax and penalties.
- Taking 401(k) loans casually; if you leave your job, repayment rules can be strict.
- Forgetting old accounts at previous employers.
A simple fix is automatic escalation: many plans let you raise your contribution by 1% each year. You will barely notice the change, but it can add up to a significantly larger retirement balance.
For official, up-to-date guidance, see the IRS 401(k) resource guide.
Frequently asked questions
How much should I put in my 401(k)?
At least enough to get the full employer match. Many people aim for 10% to 15% of income in total retirement savings over time.
Can I withdraw from my 401(k) early?
Usually only with taxes and penalties, except in certain situations. Treat it as long-term money.
Should I pick Roth or traditional?
Early in your career, many people choose Roth because their tax rate is lower now. Some split contributions between both.
401(k): key takeaways
- Contribute enough to get the full employer match.
- Choose Roth or traditional based on your tax situation.
- Target-date or low-cost index funds suit most beginners.
- Never cash out when changing jobs if you can avoid it.
Last reviewed: October 2026. This article is general education, not personal financial, tax or legal advice. Rules, rates and limits change, so check official sources or speak to a qualified professional before making decisions. See our Financial Disclaimer.