401(k) plan

A **401(k) plan** is a U.S. employer-sponsored retirement arrangement that lets eligible employees direct part of their wages into individual accounts. Contributions may receive different tax treatment depending on whether they are traditional or designated Roth deferrals. Employers may also contribute. Each participant’s balance reflects contributions, investment results, fees, and any distributions. ^[1][2]

How the plan works

The name refers to section 401(k) of the Internal Revenue Code. The Internal Revenue Service describes a 401(k) as a feature of a qualified profit-sharing plan under which employees contribute part of their wages to individual accounts. It is a **defined contribution** arrangement: the account records amounts contributed and their subsequent gains or losses, rather than promising a specified retirement payment. Employers establish the plan and set its terms within applicable legal requirements. Those terms determine matters such as eligibility, available contribution features, investment choices, and whether loans are offered. ^[1][3]

An employee contribution made through payroll is called an *elective deferral*. A participant generally elects a contribution amount or percentage of pay. Some plans instead enroll eligible employees automatically at a default rate, while preserving their ability to decline contributions or choose a different rate. In a participant-directed plan, the employee may choose among the investments made available by the plan. If an automatically enrolled employee makes no investment election, the employer selects a default investment under the plan’s procedures. ^[4][5]

Employers may make *matching contributions*, which depend on an employee’s deferrals, or *nonelective contributions*, which can be made for eligible employees regardless of whether they defer pay. An employer can use both approaches. A match is therefore a possible plan feature, not an inherent or uniform feature of every 401(k). The contribution formula and other conditions are specified in the plan documents. ^[3]

Traditional and Roth contributions

Traditional employee deferrals are generally excluded from the employee’s taxable income when contributed. Distributions of those amounts and their earnings are generally included in taxable income when withdrawn. A plan may also permit *designated Roth* deferrals. These are included in income when contributed and held in a separately accounted-for Roth account; eligible distributions, including earnings, are generally tax-free. The presence of a Roth feature depends on the particular plan. ^[1][6]

Traditional and designated Roth deferrals are different tax treatments within a workplace plan, not separate employer plans. A participant may be able to use both if the plan permits it. The IRS requires separate accounting for designated Roth contributions and their associated gains and losses. Employer contributions and other amounts can also be subject to plan-specific provisions, so the tax character of one portion of an account should not be assumed to describe the whole balance. ^[6]

Contribution limits

Federal rules impose two distinct annual limits: one on employee elective deferrals and another on total contributions allocated to an account. For **2026**, the elective-deferral limit for traditional and safe-harbor 401(k) plans is **$24,500**. The IRS generally aggregates an individual’s elective deferrals across plans when determining whether this limit has been exceeded. A plan’s own terms can impose a lower limit, and nondiscrimination requirements may restrict certain highly compensated employees. The SIMPLE 401(k) variant has a different employee-deferral limit. ^[7]

A plan that permits catch-up contributions may allow participants who are at least 50 by year-end to defer additional amounts. For 2026, the generally applicable catch-up limit in most 401(k) plans is **$8,000**. A higher **$11,250** limit applies to eligible participants who turn 60, 61, 62, or 63 during that year. These figures describe 2026 rules rather than permanent contribution amounts; statutory limits are subject to adjustment. ^[7][8]

The separate 2026 defined contribution limit is **$72,000**. In applying the overall account limit, the IRS counts ordinary employee deferrals, employer matching and nonelective contributions, and allocations of forfeitures, but not catch-up contributions. The overall limit should not be confused with the amount an employee can elect to defer from wages: employer contributions do not increase the ordinary elective-deferral limit. ^[7][8]

Eligibility, enrollment, and vesting

Eligibility rules are set out in the plan, subject to federal restrictions. The IRS notes that a plan may, under generally applicable rules, exclude some employees who have not reached age 21 or completed a year of service. Participation and service rules can be more detailed than those examples, and the plan’s summary plan description is an important record of its actual terms. ^[3][9]

Automatic enrollment changes the initial payroll election, not the employee’s ability to choose. An automatically enrolled employee must have an opportunity to elect no deferral or a different deferral amount before wages are withheld. Automatic-enrollment arrangements have several forms, with different rules for notices, default rates, and employer contributions. Whether a particular plan uses automatic enrollment cannot be inferred simply from its status as a 401(k). ^[5]

*Vesting* describes ownership of amounts in the account. An employee’s own contributions are always fully vested. Employer contributions may vest immediately or over a service-based schedule permitted for the type of plan. Consequently, the displayed account balance and the amount an employee is entitled to retain after leaving a job can differ when employer contributions have not fully vested. The applicable schedule is specified in the plan documents. ^[9]

Investments, fees, and oversight

Many 401(k) plans let participants direct investments from a menu selected for the plan. Investment performance can increase or decrease an account’s value; contributions alone do not determine its eventual balance. The U.S. Department of Labor identifies investment objectives, risks, returns, and expenses as information relevant to understanding the options in a participant-directed plan. Target-date funds are one type of investment option used in 401(k) and similar plans, but their availability depends on the plan. ^[4][2]

Costs may include investment-product fees and plan-administration expenses. Fees reduce the amount remaining in an account and can affect long-term results. Department of Labor rules require administrators of participant-directed plans to disclose specified plan, investment, and fee information to participants. The employer or other responsible parties must also attend to fiduciary responsibilities, participant disclosures, and government reporting as part of operating the plan. These responsibilities remain relevant even when outside firms perform administrative or investment-related services. ^[3][4]

Accessing money and changing jobs

A 401(k) is intended for retirement, and withdrawals are governed by the plan and federal tax rules. A distribution of traditional, previously untaxed amounts is generally taxable. A **10% additional tax** generally applies to retirement-plan distributions before age 59½ unless an exception applies. The availability of a distribution does not, by itself, establish that the distribution is exempt from tax or the additional tax. ^[1][10]

A plan may, but need not, permit hardship distributions. Under the IRS rule for distributions from an elective-deferral account, a hardship distribution must be due to an immediate and heavy financial need and limited to the amount necessary to satisfy that need. A plan may likewise permit participant loans without being required to do so. Under the general loan limit, a participant may borrow no more than the lesser of $50,000 or 50% of the vested balance, subject to specified exceptions and plan restrictions. Loans generally must be repaid within five years, with an exception to that period for a loan used to purchase a primary residence. ^[11][12]

When a worker leaves an employer, an *eligible rollover distribution* can generally be moved to another eligible retirement plan or an individual retirement account under the applicable rollover rules. A distribution paid to the individual ordinarily must be rolled over within 60 days to qualify, although special rules and exceptions exist. Not every payment is eligible: required minimum distributions and hardship distributions, for example, cannot be rolled over. A taxable amount that is not rolled over must generally be included in income. ^[13]

Required distributions

Federal required minimum distribution, or RMD, rules govern when money must begin leaving many retirement accounts. The IRS states that account owners generally begin RMDs at age **73**. For a 401(k), the first required distribution is generally due by April 1 of the year after the later of the year the participant turns 73 or retires, if the plan permits deferral until retirement. Additional circumstances can affect that timing. ^[14]

Designated Roth accounts in 401(k) plans are not subject to RMDs during the original account owner’s lifetime, although beneficiaries are subject to distribution rules. For accounts subject to RMDs, the required amount is generally calculated using the prior year-end balance and an applicable IRS distribution period. The distinction between traditional and designated Roth balances therefore remains relevant after contributions stop. ^[14]