What is a 401(k)?
A 401(k) is a US employer-sponsored, tax-advantaged retirement account named after Internal Revenue Code section 401(k). Employees defer part of each paycheck into the plan on a pre-tax (Traditional) or after-tax (Roth) basis, the money grows tax-deferred or tax-free, and employers typically add a partial match. The 2026 employee deferral limit is $23,500, plus a $7,500 catch-up at age 50 and an $11,250 super catch-up at ages 60 to 63.
Detailed definition
The 401(k) is the default workplace retirement vehicle for roughly 70 million US private-sector workers. The plan type was created almost by accident when Congress passed the Revenue Act of 1978 and added section 401(k) to the Internal Revenue Code, intending only to clarify the tax treatment of cash-or-deferred compensation arrangements. Benefits consultant Ted Benna spotted the loophole in 1980 and used it to design the first salary-deferral plan for The Johnson Companies. The IRS blessed the structure in 1981, and within a decade 401(k) plans had replaced traditional defined-benefit pensions as the standard corporate retirement benefit.
Mechanically, the plan is a trust held by the employer with a recordkeeper (Fidelity, Vanguard, Empower, Schwab, Principal, and a long tail of smaller firms run roughly 90 percent of the market). Each pay period the employer withholds the elected percentage of gross pay, sends it to the trust, and invests it in the employee's chosen funds. Most plans offer a curated menu of 15 to 25 funds, anchored by target-date series and broad index funds, plus a small slate of actively managed options. Self-directed brokerage windows are available in roughly a third of large plans.
The two big tax flavors are Traditional and Roth. Traditional deferrals reduce current taxable wages dollar-for-dollar (the contribution does not appear in Box 1 of your W-2), grow tax-deferred, and are taxed as ordinary income on withdrawal. Roth deferrals are made with after-tax dollars (they do appear in Box 1), grow tax-free, and qualified withdrawals after age 59 1/2 and a 5-year holding period are entirely tax-free. The $23,500 elective deferral limit in 2026 is shared across both buckets, but employer matches always go into the Traditional side unless your plan adopts the SECURE Act 2.0 Roth-match option.
Formula and 2026 limits
Personal cap 2026 = $23,500 elective deferral
+ $7,500 catch-up (age 50 plus)
+ $11,250 super catch-up (ages 60 to 63 only, replaces standard catch-up)
Total annual addition = Employee + Employer + Forfeitures
capped at $72,000 (under 50)
or $80,500 (50 plus, with $7,500 catch-up)
Typical match formula = 100% on first 3% of pay + 50% on next 2% of pay
= 4% of pay at a 5% employee deferral
- Elective deferral: the slice you contribute from your own paycheck, Traditional or Roth.
- Catch-up: the extra amount workers aged 50 plus can contribute on top of the base limit.
- Super catch-up: a SECURE Act 2.0 enhancement that raises the catch-up to $11,250 in the years you are 60, 61, 62, or 63; it drops back to the standard $7,500 at age 64.
- Annual additions limit (415(c)): the IRS ceiling on employee plus employer plus forfeiture contributions in one plan year.
- Compensation limit (401(a)(17)): only the first $360,000 of 2026 compensation can drive employer match formulas.
Worked example
Take a 35-year-old earning $120,000 in 2026 in the 24 percent federal bracket. She defers 10 percent to a Traditional 401(k). Her employer matches 100 percent of the first 3 percent of pay plus 50 percent of the next 2 percent.
- Employee deferral: 10 percent of $120,000 = $12,000 (well under the $23,500 limit).
- Employer match piece 1: 100 percent of the first 3 percent of $120,000 = $3,600.
- Employer match piece 2: 50 percent of the next 2 percent of $120,000 = $1,200.
- Total annual contribution: $12,000 + $3,600 + $1,200 = $16,800 invested for retirement.
- Year-1 federal tax saving: $12,000 x 24 percent = $2,880 less federal tax withheld.
Traditional 401(k) vs Roth 401(k)
The two flavors share the $23,500 deferral cap and the same investment menu. They differ on when you pay income tax and on whether RMDs ever apply to your own contributions.
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Contributions | Pre-tax, reduce Box 1 wages | After-tax, no current deduction |
| Growth | Tax-deferred | Tax-free (qualified) |
| Qualified withdrawal tax | Ordinary income | Tax-free after age 59 1/2 and 5-year clock |
| 2026 employee limit | $23,500 shared across both | |
| Catch-up at 50+ | $7,500 ($11,250 at ages 60 to 63) | |
| Employer match goes to | Traditional bucket by default | Roth match optional under SECURE Act 2.0 |
| RMDs in retirement | Yes, start at age 73 | None as of 2024 |
| Best for | Higher rate now than later | Lower rate now than later |
Related terms
Related calculators on 3Tej
Plug in your salary, deferral percentage, and match formula to see your own numbers in real time:
Frequently asked questions
What is the 401(k) contribution limit for 2026?
The 2026 employee elective deferral limit is $23,500. Workers aged 50 and older can add a $7,500 catch-up for a total of $31,000. Under SECURE Act 2.0, workers aged 60 to 63 get a higher $11,250 super catch-up, bringing their personal cap to $34,750. The overall 415(c) limit on combined employee plus employer contributions in 2026 is $72,000 (or $80,500 with the standard catch-up).
Can I withdraw from my 401(k) before age 59 1/2?
Yes, but most early withdrawals trigger a 10 percent IRS penalty on top of ordinary income tax. Statutory exceptions include the Rule of 55 (separation from service in the year you turn 55), substantially equal periodic payments (SEPP under section 72(t)), qualified domestic relations orders, total disability, unreimbursed medical expenses above 7.5 percent of AGI, and a one-per-lifetime $1,000 emergency personal expense distribution added by SECURE Act 2.0.
Is a Roth 401(k) better than a Traditional 401(k)?
Roth 401(k) is generally better if you expect a higher marginal tax rate in retirement than today (younger workers, residents of no-income-tax states planning to move to California or New York, expected Social Security plus pension stack). Traditional 401(k) is generally better if you expect a lower marginal rate later. The $23,500 elective deferral limit is shared across Roth and Traditional, so many savers split contributions to hedge tax-rate uncertainty.
What is the 401(k) employer match and how much should I contribute?
An employer match is an additional dollar contribution your employer makes when you defer. The Vanguard 2024 How America Saves report shows the most common formula is 100 percent of the first 3 percent of pay plus 50 percent of the next 2 percent, equal to a full 4 percent of pay if you defer 5 percent. Always defer at least up to the full match: skipping it is a guaranteed 100 percent loss on free money.
At what age do 401(k) Required Minimum Distributions start?
Under SECURE Act 2.0, Required Minimum Distributions (RMDs) from Traditional 401(k) accounts start at age 73 for anyone turning 73 between 2023 and 2032, and rise to age 75 for anyone turning 74 in 2033 or later. The first RMD can be deferred to April 1 of the year after you reach RMD age, but subsequent RMDs are due by December 31 each year. Roth 401(k) accounts no longer have lifetime RMDs starting in 2024.
Can I roll my 401(k) into an IRA when I leave my employer?
Yes. On separation from service you can roll a Traditional 401(k) into a Traditional IRA tax-free, or into a Roth IRA as a fully taxable Roth conversion. A Roth 401(k) rolls into a Roth IRA tax-free. Direct trustee-to-trustee transfers avoid the mandatory 20 percent withholding that applies if the plan cuts a check to you. The Rule of 55 protection on early withdrawals is lost once you roll the 401(k) into an IRA.
Sources and further reading
- IRS (2025) Retirement Topics: 401(k) and Profit-Sharing Plan Contribution Limits - official 2026 elective deferral, catch-up, and 415(c) figures.
- IRS Notice 2025-67 - inflation-adjusted retirement plan limits for tax year 2026 ($23,500 deferral, $7,500 catch-up, $11,250 super catch-up, $72,000 415(c)).
- Congress (2022) SECURE 2.0 Act of 2022, Division T of the Consolidated Appropriations Act 2023 - super catch-up, Roth match, RMD age changes, $1,000 emergency distribution.
- Vanguard (2024) How America Saves 2024 - employer match formula distribution, average deferral rates, plan design data.
- Benna, Ted with Newport, Brenton (2015) 401(k)s and IRAs For Dummies - history of the original 1981 plan design.