A 401(k) lets you save pre-tax money for retirement, grow it tax-deferred, and often get an employer match.
Benefits
- Pre-tax contributions lower taxable income now (traditional 401(k)).
- Tax-deferred growth.
- Employer match: free money.
- Roth 401(k) offers tax free withdrawals.
- High limits.
2025 limits
$23,500 employee contribution. Age 50 and older can add $7,500.
Match
Take the full match.
Withdrawals
Before 59½ typically face a 10% penalty.
Portability
Roll over to an IRA.
2025 numbers and match
For 2025, the employee elective deferral limit for a 401(k) is 23,500 USD, with an extra catch-up contribution of 7,500 USD for those 50 and older, and a higher catch-up of 11,250 USD for ages 60 to 63. The total limit for employee and employer contributions is 70,000 USD, not counting catch-ups.
- Employer matching is free money. A common formula is 50 percent of the first 6 percent of pay, and the average match is around 4.6 percent of pay according to Vanguard’s How America Saves reports.
- Traditional 401(k) contributions reduce taxable income now, and withdrawals are taxed in retirement. Roth 401(k) contributions are after tax and qualified withdrawals are tax-free.
- Most plans have a vesting schedule for employer contributions.
Rules
Withdrawals before age 59 and a half generally face a 10 percent penalty plus income tax, with exceptions. Required minimum distributions start at 73 for most people, rising to 75 in 2033. The account can be rolled over to a new employer plan or IRA. This is general information, not personal financial advice.
2025 numbers and match
For 2025 the employee contribution limit for a 401(k) is 23,500 USD, with a catch up of 7,500 USD for those 50 and older, and a higher catch up for ages 60 to 63 under SECURE 2.0. Employer matches are common, often 50 percent of the first 6 percent of pay, which is an immediate return.
Rules
Traditional contributions reduce taxable income and withdrawals are taxed. Withdrawals before age 59 and a half usually incur a 10 percent penalty. Roth 401(k) is available at many employers. Required minimum distributions start at 73.
Employer match and tax benefits
In 2023 the average employer match was about 4.6 percent of salary according to Vanguard. Contributing enough to get the full match is an immediate 50 to 100 percent return on those dollars. Traditional contributions lower taxable income: a person in the 22 percent bracket saves 220 USD in tax on 1,000 USD contributed. Investments grow tax deferred.
Vesting and portability
Employer contributions may vest over 3 to 6 years. You can roll over your 401(k) to an IRA or new plan when changing jobs. Hardship withdrawals and loans exist but come with costs. Required minimum distributions begin at age 73 (75 for those born in 1960 or later). Automatic enrollment under SECURE 2.0 applies to new plans from 2025.
Based on data from the Internal Revenue Service and Vanguard How America Saves
