How Do 401(k) Contribution Limits Work?
The IRS sets annual 401(k) contribution limits that adjust periodically for inflation. For 2026, employees can contribute up to $23,500 per year. Workers aged 50 and older can make catch-up contributions of an additional $7,500, bringing their total to $31,000. These limits apply to your own contributions, not employer matches.
What Are the Tax Benefits of a 401(k)?
Traditional 401(k) contributions are made pre-tax, lowering your taxable income in the year you contribute. Your investments grow tax-deferred, meaning you pay no taxes on dividends or capital gains until you withdraw. Many employers also offer Roth 401(k) options, where contributions are after-tax but withdrawals in retirement are tax-free.
What Happens If You Withdraw From a 401(k) Early?
Withdrawing from a 401(k) before age 59½ typically triggers a 10% early withdrawal penalty on top of ordinary income taxes. Certain hardship exceptions exist, including disability, large unreimbursed medical expenses, and separation from service at age 55 or older. Loans from a 401(k) are another option to access funds without immediate penalties.
Frequently asked questions
Should I contribute to a traditional or Roth 401(k)?
If you expect to be in a higher tax bracket in retirement, a Roth 401(k) is often better. If you want to lower your tax bill now and expect a lower tax rate later, a traditional 401(k) makes more sense. Many people benefit from splitting contributions between both.
What happens to my 401(k) if I change jobs?
You can leave it with your former employer, roll it into your new employer's plan, roll it into an IRA, or cash it out. Rolling over to an IRA or new plan avoids taxes and penalties and keeps your savings growing.