How much should I contribute to my 401(k)?

At minimum: enough to get your full employer match. If your employer matches 50% of contributions up to 6% of your salary, contribute at least 6%. Beyond the match, contribute as much as you can comfortably afford. The 2025 contribution limit is $23,500 for employees under 50.

What happens if I withdraw from my 401(k) early?

Withdrawing before age 59½ typically triggers a 10% early withdrawal penalty plus income taxes on the amount withdrawn. On a $10,000 withdrawal, you might lose $3,000-$4,000 to taxes and penalties depending on your tax bracket. There are limited exceptions (certain hardships, first-time home purchase, etc.) but early withdrawal is generally very costly.

Can I contribute to both a 401(k) and an IRA?

Yes. They're separate accounts with separate contribution limits. You can max out your 401(k) ($23,500 in 2025 for those under 50) and also contribute to a Roth or Traditional IRA ($7,000 in 2025). Income limits apply to Roth IRA eligibility, but 401(k) contributions have no income limit.

What happens to my 401(k) when I leave a job?

You have four options: leave it in your former employer's plan (if allowed), roll it into your new employer's 401(k), roll it into an IRA, or cash it out (not recommended — triggers taxes and penalties). Rolling into a new employer's 401(k) or an IRA is usually the best move.

401(k) Explained: What It Is and Why It Matters — Fiscal Word

Say you earn $60,000 a year, and your employer matches 50% of your 401(k) contributions up to 6% of your salary. If you contribute 6% — that’s $3,600 from your paycheck over the year — your employer adds another $1,800 on top.

That $1,800 is yours, and you did nothing to earn it except show up and contribute to your own retirement. That’s an immediate 50% return on $3,600. There is no investment in the world that guarantees a 50% return the moment you put money in. But an employer match does.

If you’re not contributing at least enough to capture your full employer match, this is the first thing to fix.

What a 401(k) Actually Is

A 401(k) is an employer-sponsored retirement savings account. The name comes from the section of the US tax code that created it, which tells you something about how exciting government naming conventions are — but the account itself is genuinely useful.

Here’s how it works: you elect to have a percentage of each paycheck contributed to your 401(k) before the money ever hits your bank account. The money goes directly from your employer’s payroll into your retirement account. You invest it — usually in mutual funds or index funds from a menu your employer has chosen — and it grows over time until you retire.

Employer-sponsored means the account exists through your job. Your employer sets it up, chooses the investment options available to you, and (often) contributes matching funds. When you leave a job, you can take your 401(k) with you — more on that below.

Traditional 401(k) vs. Roth 401(k)

Many employers now offer both a traditional 401(k) and a Roth 401(k). The difference is entirely about when you pay taxes.

Traditional 401(k): Contributions come out of your paycheck pre-tax — meaning you don’t pay income tax on that money this year. Your investments grow tax-deferred (you owe no taxes on the growth while the money stays in the account), and you pay ordinary income taxes when you withdraw the money in retirement.

Roth 401(k): Contributions come out of your paycheck after taxes — you pay income tax on the money now. Your investments grow tax-free, and qualified withdrawals in retirement are completely tax-free, including all the growth.

Which is better? It depends on whether you expect to be in a higher or lower tax bracket in retirement versus today.

If you’re early in your career, earning less than you expect to earn at your peak, or in a low tax bracket today: Roth is usually the better choice. Pay taxes now at a lower rate, enjoy tax-free growth for decades.
If you’re in your peak earning years and in a high tax bracket today: traditional contributions reduce your taxable income now, which can be more valuable.

If your employer only offers traditional, that’s what you have. If you have the choice, give it some thought — but don’t let the decision paralyze you. Both are dramatically better than a taxable brokerage account for retirement savings.

The Employer Match: Never Leave This on the Table

Let’s make the employer match concrete.

Scenario: You earn $60,000 per year. Your employer offers a 50% match on contributions up to 6% of your salary.

6% of $60,000 = $3,600 per year you need to contribute
Your employer adds 50% of $3,600 = $1,800 per year for free
Total going into your 401(k): $5,400 per year
Your actual out-of-pocket cost: $3,600 (and with the traditional 401(k) tax break, even less after your tax refund)

Common match structures vary. Some employers match dollar-for-dollar up to 3% or 4%. Some match 50 cents per dollar up to 6%. Some have no match at all. If you’re not sure what your employer offers, check your benefits portal or email your HR department — this is one of those questions worth asking.

The minimum you should contribute to a 401(k) with a match: whatever percentage captures the full match. Anything less means you’re declining free compensation.

2025 Contribution Limits

The IRS sets annual limits on how much you can contribute to a 401(k):

Under age 50: $23,500 per year (2025 limit)
Age 50 or older: $31,000 per year (includes a $7,500 “catch-up contribution”)

These limits apply to your personal contributions only — employer matching contributions don’t count toward your limit. Very few people hit these ceilings, but it’s useful to know they exist, especially as your income grows and you try to maximize your savings.

What Happens When You Leave a Job

Your 401(k) doesn’t disappear when you change employers. You have four options:

Leave it where it is. Many plans allow this. Your money stays invested with your former employer’s plan. This is fine short-term but can get messy if you accumulate accounts at multiple old employers.

Roll it into your new employer’s 401(k). If your new job has a 401(k) plan, you can usually transfer (roll over) your old balance into it. This keeps everything consolidated.

Roll it into an IRA. You can move the money from your 401(k) into an Individual Retirement Account (IRA) at a brokerage of your choice — Fidelity, Vanguard, Schwab, etc. This gives you more control over investment options and often access to lower-cost index funds than a typical employer plan offers.

Cash it out. Don’t do this. If you withdraw your 401(k) balance before age 59½, you pay ordinary income tax on the full amount plus a 10% early withdrawal penalty. On a $20,000 balance, you might walk away with $12,000 to $14,000 and have permanently lost decades of potential compounding.

The Most Common Mistake

The single most common 401(k) mistake is under-contributing — specifically, contributing less than the amount required to capture the full employer match.

The second most common: contributing to a 401(k) but leaving everything in the default investment option, which is often a money market fund or a conservative “stable value” fund that earns close to nothing. Check what your contributions are actually invested in. For most people, a simple low-cost index fund (look for an S&P 500 index fund or a target-date fund with a low expense ratio) is the right choice.

A 401(k) is the foundation of most people’s retirement savings. Pair it with a Roth or Traditional IRA for additional tax-advantaged space, and invest the money in low-cost index funds. If you’re just getting started, the start investing path walks through the full sequence from scratch.