401(k) Guide for Employees: How 401(k) Plans Work in 2026
A 401(k) plan is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax or after-tax wages to an individual investment account. Contributions to a traditional 401(k) are made with pre-tax dollars, reducing the employee’s taxable income for the year. Taxes are paid when funds are withdrawn in retirement. The plan takes its name from Section 401(k) of the Internal Revenue Code, which established the rules governing these plans.
For 2026, the IRS has set the annual 401(k) contribution limit at $24,500, up from $23,500 in 2025. Employees aged 50 and over may make additional catch-up contributions of $8,000, and employees aged 60 through 63 may contribute an enhanced catch-up of $11,250 under the SECURE 2.0 Act.
Source: IRS — 401(k) Limit Increases to $24,500 for 2026
What Is a 401(k) Plan?
A 401(k) plan is a defined contribution retirement plan offered by employers to eligible employees. Unlike a pension (defined benefit plan), which guarantees a specific retirement income, a 401(k) places the investment decisions and market risk with the employee. The eventual retirement benefit depends on how much the employee contributes, any employer matching contributions, and the investment performance of the account over time.
Key features of a 401(k) plan:
- Employer-sponsored — only available through an employer that offers the plan
- Employee contributions are deducted from payroll before (traditional) or after (Roth) income tax withholding
- Many employers match a portion of the employee’s contributions
- Investment options are selected by the plan sponsor and typically include mutual funds, target-date funds, and index funds
- Account balances are portable — employees who leave a job may roll over their 401(k) to a new employer’s plan or to an individual retirement account (IRA)
- Governed by the Employee Retirement Income Security Act (ERISA) and IRS regulations
Source: IRS — Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits
401(k) Contribution Limits for 2026
The IRS adjusts 401(k) contribution limits annually for cost-of-living increases. The following limits apply for the 2026 tax year:
| Limit Type | 2026 Amount | 2025 Amount |
|---|---|---|
| Employee elective deferral limit (under age 50) | $24,500 | $23,500 |
| Catch-up contribution (age 50 and over) | $8,000 | $7,500 |
| Enhanced catch-up contribution (age 60–63, SECURE 2.0) | $11,250 | $11,250 |
| Maximum total annual contribution (employee + employer, under age 50) | $72,000 | $70,000 |
| Maximum total annual contribution (age 50+, with catch-up) | $80,000 | $77,500 |
| Maximum total annual contribution (age 60–63, with enhanced catch-up) | $83,250 | $81,250 |
| Annual compensation limit for determining contributions | $360,000 | $350,000 |
SECURE 2.0 Roth catch-up requirement: Beginning in tax years after December 31, 2026, employees who earned more than $150,000 in FICA wages in the prior year must make catch-up contributions on a Roth (after-tax) basis. This requirement does not apply for tax year 2026.
Source: IRS — COLA Increases for Dollar Limitations on Benefits and Contributions; IRS Notice 2025-67
401(k) Employer Match
Many employers match a portion of employee 401(k) contributions. An employer match is essentially additional compensation contributed directly to the employee’s retirement account. Common employer match structures include:
- Dollar-for-dollar match up to a percentage of salary — for example, 100% match on the first 3% of salary contributed
- Partial match up to a percentage of salary — for example, 50% match on the first 6% of salary contributed (equivalent to 3% of salary)
- Fixed percentage of salary — employer contributes a set percentage regardless of employee contribution
Employer matching contributions do not count toward the employee’s $24,500 elective deferral limit. They do count toward the combined annual limit of $72,000 (employee + employer) for 2026.
For a detailed breakdown of how employer matching works and to estimate match amounts, see the 401(k) Calculator.
Source: IRS — Retirement Topics – Contributions
401(k) Vesting Schedule
Vesting determines how much of the employer’s matching contributions an employee is entitled to keep upon leaving the employer. Employee contributions are always 100% vested immediately. Employer contributions may be subject to a vesting schedule.
| Vesting Type | How It Works |
|---|---|
| Immediate vesting | 100% of employer contributions are owned by the employee from day one |
| Cliff vesting | Employee is 0% vested until a specific period of service (maximum 3 years under ERISA), then becomes 100% vested |
| Graded vesting | Employee vests gradually over a period of service (maximum 6 years under ERISA), reaching 100% vesting at the end |
If an employee leaves before fully vesting, the unvested portion of employer contributions is forfeited. The specific vesting schedule is determined by the employer’s plan document.
Source: U.S. Department of Labor — What You Should Know About Your Retirement Plan
401(k) Loans
Some 401(k) plans allow participants to borrow from their account balance. A 401(k) loan is not a distribution and is not subject to income tax or early withdrawal penalties if repaid according to the plan’s terms.
IRS loan rules:
- Maximum loan amount: the lesser of $50,000 or 50% of the vested account balance
- Repayment term: generally 5 years maximum (longer for a loan used to purchase a primary residence)
- Repayment: must be made in substantially level payments at least quarterly
- Interest: loan interest is paid back into the employee’s own account
- Default: if the loan is not repaid (including upon termination of employment), the outstanding balance is treated as a taxable distribution and may be subject to the 10% early withdrawal penalty if the participant is under age 59½
Not all 401(k) plans offer loans. The availability and terms of 401(k) loans are determined by the plan document.
Source: IRS — Retirement Topics – Plan Loans
401(k) Rollovers
When an employee leaves a job, the 401(k) account balance may be rolled over to a new employer’s plan or to an IRA. A rollover allows the funds to continue growing tax-deferred without triggering income tax or early withdrawal penalties.
| Rollover options: | ||
|---|---|---|
| Option | Tax Impact | Notes |
| Direct rollover to new employer’s 401(k) | No tax or penalty | Funds transfer directly between plans |
| Direct rollover to Traditional IRA | No tax or penalty | Broadens investment options |
| Direct rollover to Roth IRA | Income tax due on pre-tax amounts | No 10% penalty; Roth conversions are irrevocable |
| Cash distribution (no rollover) | Income tax + 10% early withdrawal penalty (if under 59½) | 20% mandatory federal withholding at distribution |
| Leave funds in former employer’s plan | No tax or penalty | Only if plan permits and balance exceeds $5,000 |
60-day rollover rule: If an employee receives a distribution and does not complete a direct rollover, the employee has 60 days to deposit the funds into an eligible retirement plan to avoid tax and penalties. One rollover per 12-month period is permitted for IRA-to-IRA rollovers.
For a detailed comparison of rollover options, see 401(k) vs IRA: Key Differences.
Source: IRS — Rollovers of Retirement Plan and IRA Distributions
Required Minimum Distributions (RMDs)
Participants in traditional 401(k) plans must begin taking required minimum distributions (RMDs) by a specified age. RMDs ensure that retirement savings are eventually subject to income tax.
RMD age thresholds (under SECURE 2.0 Act):
- Born before July 1, 1949: RMDs begin at age 70½
- Born July 1, 1949 – December 31, 1950: RMDs begin at age 72
- Born January 1, 1951 – December 31, 1959: RMDs begin at age 73
- Born January 1, 1960 or later: RMDs begin at age 75
Roth 401(k) accounts are no longer subject to RMDs during the account owner’s lifetime, effective for tax years beginning after December 31, 2023 (SECURE 2.0 provision).
Still-working exception: Participants who are still employed by the plan sponsor and do not own more than 5% of the business may delay RMDs from that employer’s plan until April 1 of the year following the year they retire.
Source: IRS — Retirement Topics – Required Minimum Distributions (RMDs)
401(k) Tax Treatment
Traditional 401(k): Contributions are made with pre-tax dollars. The contributions and investment earnings are taxed as ordinary income when withdrawn in retirement. This reduces current taxable income and defers taxes to a future year when the participant may be in a lower tax bracket.
Roth 401(k): Contributions are made with after-tax dollars. Qualified withdrawals — including earnings — are tax-free in retirement. To receive tax-free treatment, the account must have been open for at least 5 years and the distribution must occur after age 59½, disability, or death.
For a detailed comparison of traditional and Roth 401(k) options, see Roth 401(k) vs Traditional 401(k).
Source: IRS — Roth Comparison Chart
401(k) Beneficiary Designations
A 401(k) beneficiary is the person or entity designated to receive the account balance upon the participant’s death. Under federal law (ERISA), a surviving spouse is automatically the primary beneficiary of a 401(k) plan unless the spouse provides written consent to name a different beneficiary.
Beneficiaries who inherit a 401(k) are generally required to take distributions from the account. Under the SECURE Act of 2019, most non-spouse beneficiaries must withdraw the entire inherited 401(k) balance within 10 years of the participant’s death. Exceptions apply for surviving spouses, minor children of the participant, disabled or chronically ill beneficiaries, and beneficiaries not more than 10 years younger than the participant.
Source: IRS — Retirement Topics – Beneficiary
Frequently Asked Questions
What is a 401(k) plan?
A 401(k) plan is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their wages on a pre-tax or after-tax (Roth) basis to an individual investment account. Contributions grow tax-deferred (traditional) or tax-free (Roth) until withdrawn in retirement. The plan is governed by Section 401(k) of the Internal Revenue Code.
What is the 401(k) contribution limit for 2026?
The IRS 401(k) contribution limit for 2026 is $24,500 for employees under age 50. Employees aged 50 and over may contribute an additional $8,000 in catch-up contributions, for a total of $32,500. Employees aged 60 through 63 may contribute an enhanced catch-up of $11,250, for a total of $35,750.
What is a 401(k) employer match?
A 401(k) employer match is an additional contribution that an employer makes to an employee’s 401(k) account based on the employee’s own contributions. Match formulas vary by employer — common structures include 100% match on the first 3% of salary or 50% match on the first 6% of salary. Employer matching contributions do not count toward the employee’s $24,500 deferral limit.
What is 401(k) vesting?
Vesting determines how much of the employer’s matching contributions an employee owns. Employee contributions are always 100% vested. Employer contributions may vest immediately or over time through a cliff vesting schedule (up to 3 years) or graded vesting schedule (up to 6 years). Unvested employer contributions are forfeited if the employee leaves before fully vesting.
Can I take a loan from my 401(k)?
Some 401(k) plans allow loans. The maximum loan amount is the lesser of $50,000 or 50% of the vested account balance. Loans must generally be repaid within 5 years through substantially level payments. If not repaid, the outstanding balance is treated as a taxable distribution.
What happens to my 401(k) when I leave a job?
When leaving a job, employees may roll over the 401(k) balance to a new employer’s plan or to an IRA, leave the funds in the former employer’s plan (if permitted), or take a cash distribution. A direct rollover avoids income tax and penalties. A cash distribution is subject to income tax and a 10% early withdrawal penalty if the participant is under age 59½.
What is the difference between a traditional and Roth 401(k)?
Traditional 401(k) contributions are made with pre-tax dollars and taxed upon withdrawal. Roth 401(k) contributions are made with after-tax dollars and qualified withdrawals are tax-free. Both types share the same annual contribution limit. The choice depends on whether the participant expects to be in a higher or lower tax bracket in retirement.
When must I start taking distributions from my 401(k)?
Under the SECURE 2.0 Act, participants born between 1951 and 1959 must begin required minimum distributions at age 73. Participants born in 1960 or later must begin at age 75. Roth 401(k) accounts are no longer subject to RMDs during the account owner’s lifetime, effective for tax years after 2023.
Update History
Last Update: March 2026