How does a 401(k) work?

A 401(k) is a retirement account offered through your employer. Money comes out of your paycheck before income tax, gets invested in funds you choose, and grows untaxed until you withdraw it in retirement, when withdrawals are taxed as income. A Roth 401(k) flips that: taxed now, tax-free later.

The single most important feature is the employer match. If your company matches 50 cents on the dollar up to 6 percent of salary, contributing less than 6 percent means declining free money. Contribute at least to the full match before doing anything else with spare cash.

The IRS caps annual contributions and adjusts the limit most years; it was $23,500 for 2025, with extra catch-up room after age 50. Withdrawals before 59 and a half generally cost a 10 percent penalty plus taxes, so treat it as untouchable.