Guide · Retirement
401(k) Explained: Contribution Limits, Employer Match, and How to Maximize It
A 401(k) is the backbone of most American retirement savings — but the details of contribution limits, employer matching, and tax treatment trip people up. Here's how it actually works.
How a 401(k) works
A 401(k) is an employer-sponsored retirement account. You elect a percentage of each paycheck to contribute, it's invested in funds your plan offers, and it grows tax-deferred (Traditional) or tax-free (Roth) until retirement.
Many employers add a matching contribution — typically a percentage of your contribution up to a cap expressed as a percent of salary. That match is effectively free money, and not contributing enough to capture it is one of the most common retirement planning mistakes.
2026 contribution limits
SECURE 2.0 introduced an enhanced catch-up limit for savers aged 60 to 63, on top of the standard catch-up available from age 50. These limits apply to your own elective deferrals — employer matching contributions don't count against this limit (though there is a separate, higher combined limit across all contributions).
The cost of not getting the full match
On a $75,000 salary with a 50% match up to 6% of salary, contributing only 3% instead of 6% leaves $1,125 of employer money on the table every single year:
| Your Contribution | Employer Match | Match Missed |
|---|---|---|
| 3% | $1,125 | $1,125 |
| 6% | $2,250 | $0 |
| 10% | $2,250 | $0 |
Compounded over a 30-year career at 7% growth, that missed $1,125 a year is worth over $113,000 by retirement.
Frequently asked questions
What happens if I contribute more than the IRS limit?
Excess deferrals must be withdrawn by April 15 of the following year, or you face double taxation — once when contributed and again when withdrawn. Most payroll systems stop your contributions automatically once you hit the limit.
Should I choose Traditional or Roth 401(k) contributions?
Traditional contributions reduce your taxable income now and are taxed on withdrawal — good if you expect to be in a lower tax bracket in retirement. Roth contributions are taxed now but grow and withdraw tax-free — good if you expect to be in the same or higher bracket later, or want tax diversification.
What is vesting, and does it affect my employer match?
Vesting is the schedule over which employer contributions become fully yours. Your own contributions are always 100% vested immediately, but employer match often vests over 2–5 years — leave before that and you can forfeit unvested match.
Can I take a loan from my 401(k)?
Many plans allow loans up to the lesser of $50,000 or 50% of your vested balance, repaid via payroll deduction with interest paid back to your own account. If you leave your job with an outstanding loan, it often becomes due in full and unpaid balances are treated as a taxable distribution.