401(k) Guide: Everything You Need to Know

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement savings plan that offers tax advantages to encourage saving. Named after the tax code section that created it, the 401(k) is the primary retirement vehicle for millions of Americans.

2025 401(k) Contribution Limits

| Contribution Type | 2025 Limit |

|-------------------|------------|

| Employee contribution | $23,500 |

| Catch-up (age 50+) | +$7,500 |

| Total employee (50+) | $31,000 |

| Total all sources | $70,000 |

Types of 401(k)s

Traditional 401(k)

• Contributions are pre-tax (reduce current taxable income)
• Money grows tax-deferred
• Pay taxes on withdrawals in retirement

Roth 401(k)

• Contributions are after-tax (no current tax benefit)
• Money grows tax-free
• Qualified withdrawals are completely tax-free

Which to Choose?

• Traditional: Better if you expect lower taxes in retirement
• Roth: Better if you expect higher taxes in retirement
• Both: Having both provides flexibility

The Employer Match: Free Money

Many employers match your contributions—this is essentially free money.

Common Match Formulas

• 100% of first 3%: Contribute 3% of salary, employer adds 3%
• 50% of first 6%: Contribute 6% of salary, employer adds 3%
• Dollar-for-dollar up to 4%: Contribute 4%, employer adds 4%

The Golden Rule

Always contribute at least enough to get the full employer match. Not doing so is leaving free money on the table.

Example

Salary: $60,000

Match: 50% of first 6%

• You contribute 6% ($3,600)
• Employer adds 3% ($1,800)
• Total annual contribution: $5,400
• Miss this = lose $1,800/year

Vesting Schedules

Vesting determines when employer contributions become truly yours.

Types of Vesting

• Immediate: Employer contributions are yours right away
• Cliff vesting: 100% vested after X years (often 3)
• Graded vesting: Gradually vest over time (e.g., 20% per year)

Your own contributions are always 100% vested immediately.

Investment Options

Most 401(k)s offer these investment types:

Target-Date Funds

• Select based on expected retirement year (e.g., 2050 fund)
• Automatically adjusts from stocks to bonds as you age
• Best for hands-off investors

Index Funds

• Track market indexes (S&P 500, total stock market)
• Low fees, broad diversification
• Best for cost-conscious investors

Actively Managed Funds

• Professionals try to beat the market
• Higher fees
• Often underperform index funds long-term

Company Stock

• Some plans offer employer stock at a discount
• Be careful of concentration risk
• Don't let it exceed 10% of portfolio

401(k) Fees

Fees significantly impact long-term growth. Check your plan's:

Expense Ratios

Annual percentage charged by funds. Aim for under 0.5%, ideally under 0.2%.

Administrative Fees

Some plans charge flat fees or percentage-based fees.

Fee Impact Example

$10,000 invested for 30 years at 7% return:

• 0.1% fees: $74,017
• 1.0% fees: $57,435
• Difference: $16,582

Withdrawal Rules

Before Age 59½

• 10% early withdrawal penalty (plus taxes on traditional)
• Exceptions: disability, death, qualified domestic relations order

Age 59½ and Older

• Withdraw without penalty
• Still pay income tax on traditional withdrawals

Required Minimum Distributions (RMDs)

• Must start withdrawing by age 73 (born 1951-1959) or 75 (born 1960+)
• Amount based on life expectancy tables
• Roth 401(k) no longer has RMDs (as of 2024)

401(k) Strategies

1. Max the Match First

Before anything else, contribute enough to get the full employer match.

2. Increase Contributions Over Time

Start with what you can, increase 1% each year until you reach the max.

3. Rebalance Annually

Keep your asset allocation on target by rebalancing once a year.

4. Avoid Loans and Early Withdrawals

Your future self will thank you. These derail compound growth.

5. Don't Panic During Downturns

Market drops are normal. Stay invested—historically, markets recover.

What Happens When You Leave Your Job?

Options

1. Leave it: If plan allows and balance >$5,000
2. Roll to new employer's 401(k): Consolidates accounts
3. Roll to IRA: More investment options
4. Cash out: Avoid! Triggers taxes and penalties

Rollover Process

• Request direct rollover (check goes to new custodian)
• Avoid indirect rollover (check to you) to prevent 60-day deadline issues

Key Takeaways

1. Always contribute enough to get the full employer match
2. Choose target-date or low-cost index funds
3. Watch fees—they compound just like returns
4. Don't withdraw early—let compound growth work
5. Roll over when changing jobs instead of cashing out