401(k) Employer-Sponsored Retirement Plan (2023)

A 401(k) is an employer-sponsored retirement plan. Commonly offered as part of a job benefits package, employees may save a portion of their salary in a 401(k) account, subject to annual limitations. Employers often match a portion of their employees’ contributions.

The money you save in a 401(k) is invested in the stock market, enjoying tax-sheltered growth over the years to provide you with income in retirement.

What Is a 401(k)?

A 401(k) is a type of defined contribution plan, which means that employees decide how much to contribute to their account. The unintuitive name “401(k)” comes from the section of the Internal Revenue Code that governs the plans.

Contributions to a traditional 401(k) plan are taken out of your paycheck before income taxes are calculated. This means that contributions help lower your taxable income immediately.

The contributions are invested in mutual funds and other investments, and grow in value over time. When you take money out of your traditional 401(k) in retirement, you pay ordinary income tax on the withdrawals.

What Is a Roth 401(k)?

Some employers offer a Roth 401(k) option. Employees make contributions from after-tax income. Like a Roth IRA, you pay no income taxes on qualified distributions, such as those made after the age of 59 ½—assuming your first contribution was made five years prior.

Choosing a Roth 401(k) can make sense if you believe you will be in a higher tax bracket when you retire than you are today.For many young earners who are just beginning their careers, lower income levels and tax brackets could make a Roth 401(k) a great choice.

There is nothing forcing you to choose between either atraditional 401(k) or a Roth 401(k)—you can make contributions to both kinds of 401(k) plan, if your employer offers them. Consider speaking with a tax professional or a financial advisor when deciding between a traditional or a Roth 401(k), or dividing your contributions between both types.


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401(k) Contributions

You decide how much of your income to contribute to a 401(k) account every year, subject to IRS limits.

Generally you elect to save a percentage of your annual salary in your employer’s 401(k) when you start a new job, and you can adjust your contribution level up or down as often as the rules of the plan allow. You may halt contributions entirely at any time, for any reason.

Let’s say your bi-monthly paycheck is $2,000, and you chose to contribute 5 percent of your annual salary in the company’s traditional 401(k) plan. In this case, $100 would be subtracted from each paycheck and deposited in your 401(k) account. Your taxable incomewould be $1,900 (assuming no other pre-tax deductions). If you opted for a Roth 401(k), the $100 would be taken out of each paycheck after taxes.

Depending on your employer’s plan, you may be automatically enrolled in a 401(k) plan at a set contribution rate when you start a job, unless you choose to opt-out of the plan. Alternatively, you may need to affirmatively choose whether to enroll in your employer’s 401(k) plan or opt-out.

Annual 401(k) Contribution Limits

For 2022, the 401(k) employee contribution limit is $20,500. If you’re 50 or older, you can make an additional $6,500 in catch-up contributions, for a total maximum contribution limit of $27,000.

For 2023, employees can contribute $22,500 to a 401(k) account. If you’re 50 or older, you can deposit an extra $7,500 in catch-up contributions, for a combined maximum contribution limit of $30,000.

These limits apply to all 401(k) contributions, even if you split them between pre-tax and Roth contributions, or you have two employers in a year and two separate 401(k) accounts.

401(k) Employee Annual Contribution Limits

2022 Limit2023 Limit

Maximum Employee Contribution



Catch-Up Contributions for those 50 or Older



About a fifth of employers also allow after-tax, non-Roth contributions. In this case, a combined employee and employer contribution limit applies. In other words, your employer’s contributions, combined with your pre-tax, Roth and after-tax contributions, can’t exceed this limit.

For 2022, the combined employer and employee 401(k) contribution limit is $61,000 and $67,500 for those 50 or older. In 2022, the combined employer and employee 401(k) contribution limit is $66,000 and $73,500 for those 50 or older.

Total 401(k) Employer and Employee Annual Contribution Limits

2022 Limit2023 Limit

401(k) Employee & Employer Contributions



Total with Catch-Up Contributions for those 50 or Older



The contribution limits are updated annually, so it’s important to check in every year to see whether you can increase your contributions.

How Do Employer 401(k) Matching Contributions Work?

Some employers offer to match their employees’ 401(k) contributions, up to a certain percentage of their salary.

One common approach involves an employer matching employee contributions dollar-for-dollar up to a total amount equal to 3 percent of their salary. Another popular formula is a $0.50 employer match for every dollar an employee contributes, up to a total of 5 percent of their salary.

Continuing our example from above, consider the impact on your 401(k) savings of a dollar-for-dollar employer match, up to 3 percent of your salary. If you contribute 5 percent of your annual pay and receive $2,000 every pay period, with each paycheck you would be contributing $100 and your employer would contribute $60.

When starting a new job, find out whether your employer provides matching 401(k) contributions, and how much you need to contribute to maximize the match. If they do, you should at a minimum set your 401(k) contribution level to obtain the full match, otherwise you’re leaving free money on the table.

401(k) matching contributions and vesting

Some employers grant 401(k) matching contributions that vest over time. Under a vesting schedule, you gradually take ownership of your employer’s matching contributions over the course of several years. If you remain with the company for the entire vesting period, you are said to be “fully vested” in your 401(k) account.

(Video) How 401(k) Plans Work And Why They Killed Pensions

Employers impose a vesting schedule to incentivize employees to remain with the company.

For example, imagine that 50% of your employer’s matching contributions vest after you’ve worked for the company for two years, and you become fully vested after three years. If you were to leave the company and take a new job after two years, you would pass up owning half of the matching contributions pledged by your employer.

Keep in mind, however, that you always maintain full ownership of contributions you have made to your 401(k). Vesting only involves the employer’s matching contributions.

Choosing Investments in Your 401(k)

You will usually have several investment optionsin your 401(k) plan. The plan administrator provides participants with a selection of different mutual funds, index funds and sometimes even exchange traded funds (ETFs)to choose from.

You get to decide how much of your 401(k) balance to invest in different funds. You could opt to invest 70 percent of your contributions in an equity index fund, 20 percent in a bond index fund and 10 percent in a money market mutual fund, for example.

Plans that automatically enroll workers almost always invest their contributions in what is known as a target-date fund.That’s a fund that holds a mix of stocks and bonds, with the mix determined by your current age and your “target” date for retirement. Generally, the younger you are, the higher the percentage of stocks. Even if you are automatically enrolled in a target-date fund, you are always free to change your investments.

Investing options available in 401(k) plans vary widely. You should consider consulting with a financial adviser to help you figure out the best investing strategy for you, based on your risk tolerance and long-term goals.

Related: Find A Financial Advisor In 3 minutes

Withdrawing funds from your 401(k)

Funds saved in a 401(k) are intended to provide you with income in retirement. IRS rules prevent you from withdrawing funds from a 401(k) without penalty until you reach age 59 ½.

With a few exceptions (see below), early withdrawals before this age are subject to a tax penalty of 10% of the amount withdrawn, plus a 20% mandatory income tax withholding of the amount withdrawn from a traditional 401(k).

After you turn 59 ½, you can choose to begin taking distributions from your account. You must begin withdrawing funds from your 401(k) at age 72 (or age 70 ½ if you were born before June 30, 1949—the SECURE act increased this age threshold), as required minimum distributions (RMDs).

How do 401(k) RMDs work?

Holders of both traditional 401(k)s and Roth 401(k)s are required to take RMDs. The amount of your RMDs is based on your age and the balance in your account.

As the name suggests, an RMD is a minimum—you can withdraw as much as you wish from the account each year, either in one lump sum or in a series of staggered withdrawals. As noted above, RMDs from a traditional 401(k) are included in your taxable income, while RMDs from Roth 401(k)s are not.

How to avoid 401(k) early withdrawal penalties

There are certain exceptions that allow you to take early withdrawals from your 401(k) and avoid the 10% early withdrawal tax penalty if you aren’t yet age 59 ½. Some of these include:

  • Medical expenses that exceed 10% of your adjusted gross income
  • Permanent disability
  • Certain military service
  • If you leave your employer at age 55 or older
  • A Qualified Domestic Retirement Order (QDRO) issued as part of a divorce or court-approved separation

Even if you can escape the additional 10% tax penalty, you still have to pay taxes on your withdrawal from a traditional 401(k). (In the case of a distribution paid to an ex-spouse under a QDRO, the 401(k) owner owes no income tax and the recipient can defer taxes by rolling the distribution into an IRA.)

401(k) Loans

Some 401(k) plans let you borrow against your savings, via a so-called 401(k) loan. It’s possible to borrow up to $50,000 or 50% of your vested balance, whichever is less. You generally have five years to repay your loan, and you’ll be charged interest and origination fees—although the interest goes back into your 401(k).

If you fail to pay back the loan after five years, the IRS considers it a distribution, subject to taxes and that 10 percent tax penalty. If you leave your job or lose your job, the plan sponsor may require the employee to repay the outstanding balance immediately and if you don’t, the sponsor will report it to the IRS as a distribution.

However, you have until October of the next year—the due date of your tax return with extensions—to deposit the loan balance in an IRA and avoid owing any immediate tax or penalty.

(Video) How To: Set up 401k’s as an Employer

What happens to your 401(k) when you change jobs?

You have several options for your 401(k) balance when you change jobs. Avoid simply cashing out your savings—if you’re under 59½ years old, you’ll get hit with the 10 percent early withdrawal tax penalty, and if it’s a traditional 401(k) you’ll own income tax on the balance.

If you have less than $1,000 in your 401(k), the plan administrator is empowered to write you a check for the balance. This gives you 60 days to reinvest the money in an IRA or your new company’s 401(k) plan before you are subject to the additional 10% tax penalty and possible ordinary income tax.

If you have more than $1,000 but less than $5,000 in your 401(k), the administrator can open an IRA in your name and roll your balance over into it.

Leave your 401(k) with your old employer

Some 401(k) plans let you leave your money right where it is after you leave the company. However, as you move through your career, this means you will need to keep track of multiple 401(k) accounts. Some employers require you to withdraw or rollover your 401(k) within a set period of time after you’ve left your job.

Move your 401(k) into your new employer’s plan

In some cases you can roll your old 401(k) balance over into your new employer’s plan, although not all plans allow this. Find out from your new employer whether they accept a trustee-to-trustee transfer of funds and how to handle the move. Make sure you understand the tax treatment of your 401(k) balances. Make sure that traditional 401(k) funds are rolled into a traditional 401(k) and Roth funds end up in a Roth account.

Roll your 401(k) balance into IRA

Another possibility is for you to roll the balance over into an IRA. When moving the money, make sure you initiate a trustee-to-trustee transfer rather than withdrawing the funds and then depositing them into a new IRA. Many IRA custodians allow you to open a new account and designate it as a rollover IRA so you don’t have to worry about contribution limits or taxes. When rolling your 401(k) balance into an IRA, make sure you place traditional 401(k) funds in a traditional IRA, and Roth funds in a Roth IRA.

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Is 6% to 401k enough? ›

For that reason, many experts recommend investing 10-15 percent of your annual salary in a retirement savings vehicle like a 401(k).

Is 15% enough for 401k? ›

In fact, most financial experts will suggest investing 15% of your income annually in a retirement account (including any employer contribution). With 401(k)s, or employer-sponsored retirement plans, you may find that your company offers a match if you contribute a certain amount.

Is 3% enough for 401k? ›

In any case, if your company offers a 401(k) matching contribution, you should put in at least enough to get the maximum amount. A typical match might be 3% of your salary or 50% of the first 6% of the employee contribution. "There is no ideal contribution to a 401(k) plan unless there is a company match.

How much should I put in 401k per paycheck? ›

Financial experts generally recommend that everyone contribute 10% of their paycheck to a 401(k), but this may not be doable for all. Plus, often times we think about other ways we'll need to use that money now.

Can I contribute 100% of my salary to my 401k? ›

401(k) contribution limits in 2022 and 2023

For 2023, your total 401(k) contributions — from yourself and your employer — cannot exceed $66,000 or 100% of your compensation, whichever is less. For 2022, that number is $61,000 or 100% of your compensation.

Should I contribute 10% to 401k? ›

Most retirement experts recommend you contribute 10% to 15% of your income toward your 401(k) each year. The most you can contribute in 2023 is $22,500 or $30,000 if you are 50 or older (that's an extra $7,500). Consider working with a financial advisor to determine a contribution rate.

How much should I put in my 401K per month? ›

If you're wondering how much you should put in your 401(k), one good rule of thumb is 15% of your pretax income, including your employer's match.

How much should I have in my 401K at 35? ›

So, to answer the question, we believe having one to one-and-a-half times your income saved for retirement by age 35 is a reasonable target. It's an attainable goal for someone who starts saving at age 25. For example, a 35-year-old earning $60,000 would be on track if she's saved about $60,000 to $90,000.

How much should a 30 year old have in 401K? ›

Fidelity recommends that Americans save 15% of their salary over the course of their career in order to retire with 10 times their salary in retirement savings. This is how much Fidelity recommends Americans have saved at every age: By 30, you should have the equivalent of your salary saved.

What does 3% employer match 401K mean? ›

“We commonly see employers offer a 3%, dollar-for-dollar match,” said Taylor. “They match 100% of your contributions up to 3% of your salary.” Imagine you earn $60,000 a year and contribute $1,800 annually to your 401(k)—or 3% of your income.

How much should I contribute to my 401K with 3% match? ›

Employees in this type of plan would need to contribute at least 6% of their salary to the 401(k) plan to get the maximum possible 401(k) match. Saving 6% of your pay in a 401(k) plan and earning a 3% 401(k) match means you are tucking away an amount equal to 9% of your salary each pay period for retirement.

How does a 2% 401K match work? ›

With a dollar-for-dollar match, your employer will put in the same amount of money you do — up to a certain amount. An example of dollar-for-dollar is up to 4% of your salary. In this case, if you put in 4%, they put in 4%; if you put in 2%, they put in 2%.

How much should you put in 401k by age? ›

By age 40, you should have three times your annual salary already saved. By age 50, you should have six times your salary in an account. By age 60, you should have eight times your salary working for you. By age 67, your total savings total goal is 10 times the amount of your current annual salary.

What is a good 401k match? ›

The most common Safe Harbor 401(k) matching formulas are: 100% match on the first 3% of employee contributions, plus 50% match on the next 3-5% (Basic match) 100% match on the first 4-6% of employee contributions (Enhanced match) At least 3% of employee pay, regardless of employee deferrals (Nonelective contribution)

What happens if I put too much in my 401k? ›

The bad news. You'll end up paying taxes twice on the amount over the limit if the 401(k) overcontribution isn't paid back to you by the tax-filing deadline, generally around April 15. You'll be taxed first in the year you overcontributed, and again in the year the correction occurs, Appleby says.

How much should I contribute to my 401k if I make 70k? ›

If your salary is $70,000 a year, they will match dollar for dollar, up to $3,500 (5% of $70,000) in contributions to your 401(k). When you look at it in dollar terms, it becomes much harder to leave this money on the table. ALWAYS contribute to your employer's match!

How much should I put in my 401k each week? ›

“Ideally, if you have a 401(k), you should contribute 15-20 percent of your gross income into it. However, Millennials are contributing about 7.3 percent of their paychecks to retirement savings plans, according to Fidelity.

What is the 70 20 10 rule money? ›

How the 70/20/10 Budget Rule Works. Following the 70/20/10 rule of budgeting, you separate your take-home pay into three buckets based on a specific percentage. Seventy percent of your income will go to monthly bills and everyday spending, 20% goes to saving and investing and 10% goes to debt repayment or donation.

Is 10% to retirement enough? ›

Saving only 10% of your income—a time-honored yardstick financial planners often use—isn't enough to retire. Saving 10% of your salary per year for retirement doesn't take into account that younger workers earn less than older ones.

When should you not contribute to 401k? ›

Should Investors Ever Pause 401(k) Contributions? Investors should avoid pausing their 401(k) contributions during a bear market, recession or market downturn. The loss in compounding earnings typically outweighs any potential for savings you think you're getting by keeping the cash out of your retirement savings.

Is 500 a month good for 401k? ›

Most experts recommend putting at least 10% to 15% of your income toward your retirement fund, so $500 per month is right on target according to this guideline.

How much do I need in 401k to get 2000 a month? ›

You'd need to save at least $480,000 before retirement if you want $2,000 per month.

Is 400 a month good for 401k? ›

In fact, if you sock away $400 a month over a 43-year period, and your invested savings generate an average annual 10.5% return, then you'll end up with $3.3 million. And that should be enough money to enjoy retirement to the fullest.

What is the average 401K balance for a 55 year old? ›

Average 401k by Age (Vanguard)
2 more rows
Sep 7, 2022

How much do I need in my 401K to retire at 40? ›

You still have roughly 20 years before the conventional retirement age, so make the most of your savings opportunities. Fidelity says by age 40, aim to have a multiple of three times your salary saved up. That means if you're earning $75,000, your retirement account balance should be around $225,000 when you turn 40.

Is 35 too late for 401K? ›

It's never too late to start saving money for your retirement. Starting at age 35 means you have 30 years to save for retirement, which will have a substantial compounding effect, particularly in tax-sheltered retirement vehicles.

How much will 401k be worth in 20 years? ›

You would build a 401(k) balance of $263,697 by the end of the 20-year time frame. Modifying some of the inputs even a little bit can demonstrate the big impact that comes with small changes. If you start with just a $5,000 balance instead of $0, the account balance grows to $283,891.

Do I have enough in my 401k? ›

Instead of worrying about saving a fixed amount, most financial advisors recommend that you have enough saved to cover 60% to 80% of your pre-retirement income. Experts suggest this amount should let you maintain your current lifestyle in retirement.

How much will a 401k grow in 20 years? ›

The expected inflation rate is 3% per year. By the end of the 20-year time horizon, you can expect your 401(k) balance to increase to $283,724. However, if you start with a 401(k) balance of $50,000 instead of a $0 balance, the 401(k) will grow to $477,209 in 20 years.

Is 401k worth it if employer does not match? ›

If your employer doesn't offer any match, you may be wondering if you should still participate. The short answer in most cases is that it does still make sense to contribute to a 401(k) because it can offer significant tax advantages.

Should I max out my 401k if my employer doesn't match? ›

When you know that your income will continue to be high or you still have plenty of room for income growth, then enrolling in a 401(k) even without a match would still make sense to save for retirement. Second, high earners may find the contribution limits to a traditional IRA or Roth IRA to be too low.

Should I max out my 401k employer match? ›

You should prioritize maxing out your 401(k), at least until you've maximized any matching contributions your employer offers. You can turn your attention more aggressively toward IRA contributions after you've done that.

How much is a 5% 401k match? ›

Dollar-for-Dollar Match Up to 5%

Your company might include a dollar for every dollar you put in your 401(k) plan until you reach a total of 5% of your before-tax pay for the year. If you earn $50,000 and you add your 5% to the plan, that's $2,500 you've contributed. Then, your employer will match 100%—also $2,500.

Does 401K double every 7 years? ›

“The longer you can stay invested in something, the more opportunity you have for that investment to appreciate,” he said. Assuming a 7 percent average annual return, it will take a little more than 10 years for a $60,000 401k balance to compound so it doubles in size.

How many years should it take for your 401K to double? ›

The Rule of 72 suggests that only takes 3.6 years. Please remember that this is an estimation tool. Markets at any point can vary dramatically from historical averages. Strong markets could shorten the time for your money to double, and down markets can push out this timing.

Does my wife get half of my 401K? ›

Dividing 401(k) & Retirement Plans in California

In California Law, marital assets and retirement plans must be divided in half. This state community property rule means that the non-participating spouse shall receive 50% of the retirement plan value accumulated during the marriage.

How much should a 45 year old have in 401k? ›

By age 45: Have four times your salary saved. By age 50: Have six times your salary saved. By age 55: Have seven times your salary saved. By age 60: Have eight times your salary saved.

What is the average 401k balance for a 65 year old? ›

Vanguard Average 401(k) Balances by Age
AgeAverage 401(k) BalanceMedian 401(k) Balance
2 more rows
Jul 1, 2022

What is the 4 rule for 401k? ›

One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.

Can an employer take back their 401k match? ›

Under federal law an employer can take back all or part of the matching money they put into an employee's account if the worker fails to stay on the job for the vesting period. Employer matching programs would not exist without 401(k) plans.

What does 6% contribution to 401k mean? ›

Q: What does 6% 401k match means? A: This means that the employer is matching up to a total of 6% of an employee's overall compensation to his or her 401k account on top of what the employee is contributing. So if an employee is earning $50,000 per year, the employer's match would not exceed $3,000.

Is 8% too much for 401k? ›

*Generally, financial planners say the expected rate of return for a 401k is between 8% and 10%.

How do I maximize my employer 401 K match? ›

The best way to take advantage of a 401(k) match is to set up payroll withholding. If your employer will match up to 6% of your salary, make sure to direct at least 6% of your paycheck to the 401(k) plan.

What does 50% of 6% 401k match mean? ›

Partial matching

Your employer will match part of the money you put in, up to a certain amount. The most common partial match provided by employers is 50% of what you put in, up to 6% of your salary. In other words, your employer matches half of whatever you contribute … but no more than 3% of your salary total.

What does 3% 401k match mean? ›

“We commonly see employers offer a 3%, dollar-for-dollar match,” said Taylor. “They match 100% of your contributions up to 3% of your salary.” Imagine you earn $60,000 a year and contribute $1,800 annually to your 401(k)—or 3% of your income.


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