401(k) Guide 2026: Contribution Limits, Employer Match & Roth vs Traditional

401(k) Basics You Need to Know

A 401(k) is a retirement savings account offered by your employer. Money goes in before taxes (usually), grows tax-free, and you pay taxes when you withdraw in retirement. It's the single most powerful wealth-building tool available to most Americans.

Why? Three reasons:

1. Tax advantages: Every dollar you contribute reduces your taxable income today
2. Employer match: Free money. Literally free money.
3. Forced savings: Money comes out before you see it. Can't spend what you don't see.

If your employer offers a 401(k) and you're not using it, you're leaving money on the table. Period.

How It Works

Step	What Happens
1. Contribution	Money deducted from paycheck before taxes
2. Investment	You choose from plan's investment options
3. Growth	Investments grow tax-deferred for decades
4. Withdrawal	Take money out after 59½, pay income tax then

2026 Contribution Limits

The IRS sets limits on how much you can put in each year. These are the 2026 numbers:

Current Limits

Limit Type	2026 Amount	Notes
Employee contribution	$23,500	Your contributions only
Catch-up (50+)	$7,500	Extra if you're 50 or older
Super catch-up (60-63)	$11,250	New in 2025, higher catch-up for ages 60-63
Total limit (with employer)	$70,000	Employee + employer contributions combined

That $23,500 limit is just YOUR contributions. Employer match doesn't count against it. If your employer matches $5,000, you can still contribute the full $23,500.

What This Means for Your Paycheck

To max out at $23,500 over 24 paychecks (biweekly), you need to contribute about $980 per paycheck. That's a lot. But remember—it comes out pre-tax. A $980 contribution might only reduce your take-home by $700-750 depending on your tax bracket.

The Employer Match

This is the most important concept in this entire article. Read it twice.

Many employers match your contributions up to a certain percentage. Common structures:

• Dollar for dollar up to 3%: You put in 3% of salary, they put in 3%
• 50 cents on the dollar up to 6%: You put in 6%, they put in 3%
• 100% match up to 4%: You put in 4%, they match 4%

Example: Why Match Matters

Scenario	Your Contribution	Match (100% up to 4%)	Total
You contribute 0%	$0	$0	$0
You contribute 2%	$1,600	$1,600	$3,200
You contribute 4%	$3,200	$3,200	$6,400
You contribute 6%	$4,800	$3,200	$8,000

(Based on $80,000 salary)

The match is a 100% instant return on your money. There is no investment in the world that guarantees 100% returns. Get the full match. No excuses.

Vesting Schedules

Here's the catch: employer contributions often vest over time. If you leave before you're fully vested, you forfeit some or all of the match.

• Immediate vesting: You keep 100% of match from day one (best)
• Cliff vesting: 0% until year 3, then 100% (common)
• Graded vesting: 20% per year, fully vested at year 5

Check your plan documents. If you're thinking of leaving, know what you're giving up.

Traditional vs Roth 401(k)

Many employers now offer both. Here's the difference:

The Key Distinction

Feature	Traditional 401(k)	Roth 401(k)
Tax on contributions	Pre-tax (reduces taxable income)	After-tax (no deduction)
Tax on growth	Tax-deferred	Tax-free
Tax on withdrawal	Taxed as income	Tax-free (if qualified)
Best if you expect...	Lower taxes in retirement	Higher taxes in retirement

Which Should You Choose?

The honest answer: nobody knows what tax rates will be in 30 years. But here's my framework:

• Early career, lower income: Roth. You're in a low bracket now. Lock in tax-free growth.
• Peak earning years: Traditional. Get the deduction when your marginal rate is highest.
• Uncertain: Split it. Some traditional, some Roth. Hedge your bets.

There's also a practical consideration: Roth contributions feel more expensive because they come from after-tax dollars. A $1,000 traditional contribution might cost you $750 after the tax benefit. A $1,000 Roth contribution costs you the full $1,000.

Choosing Your Investments

Most 401(k) plans offer 15-30 investment options. Here's how to think about them:

Common Options

Option Type	What It Is	Risk Level
Target date fund	All-in-one fund that adjusts based on retirement year	Varies with age
S&P 500 index	Tracks largest 500 US companies	Moderate-high
Total stock market	All US stocks including small caps	Moderate-high
International stock	Non-US developed and emerging markets	Moderate-high
Bond fund	Corporate and government bonds	Low-moderate
Stable value	Capital preservation, like a savings account	Very low
Company stock	Your employer's shares	Very high (concentrated)

My Simple Approach

If you don't want to think about it: pick the target date fund closest to your expected retirement year (e.g., "Target 2055" if you'll retire around 2055). Done. One fund. Professionally managed. Automatically rebalanced.

If you want more control:

• Young (20s-30s): 90% stocks (mix of US and international), 10% bonds
• Middle (40s-50s): 70-80% stocks, 20-30% bonds
• Near retirement: 50-60% stocks, 40-50% bonds

What to Avoid

• Too much company stock: Your job AND retirement shouldn't both depend on one company. Ask Enron employees.
• High-fee actively managed funds: Check expense ratios. Anything over 0.5% annually is expensive.
• Stable value when you're young: It's too conservative. You have decades to ride out volatility.

Mistakes People Make

I've seen these errors repeatedly. Don't make them:

Mistake 1: Not Contributing Enough for the Match

If your employer matches 4% and you're only contributing 2%, you're leaving money on the table. I don't care if you have debt. I don't care if money is tight. Get. The. Full. Match.

Mistake 2: Cashing Out When Changing Jobs

When you leave a job, you can roll your 401(k) to an IRA or your new employer's plan. Do that. Don't take the cash. Taking a distribution triggers:

• Income taxes on the full amount
• 10% early withdrawal penalty (if under 59½)
• Lost decades of compound growth

A $50,000 cash-out at age 30 could cost you $500,000+ in retirement. Roll it over.

Mistake 3: Never Increasing Contributions

Starting at 3% is fine. Staying at 3% for 20 years is not. Every time you get a raise, increase your contribution rate. You won't miss money you never saw in your paycheck.

Mistake 4: Ignoring Fees

A 1% expense ratio doesn't sound like much. But over 30 years on a $500,000 portfolio, it's over $150,000 in lost wealth. Check your fund expense ratios. Choose low-cost index funds when available.

Mistake 5: Taking Loans

401(k) loans seem harmless—you're borrowing from yourself! But:

• You miss market gains while money is out
• If you leave your job, the full balance is often due within 60 days
• If you can't repay, it becomes a taxable distribution plus penalty

Treat your 401(k) as untouchable until retirement.

Beyond the 401(k)

Maxed out your 401(k)? Or your plan is terrible? Here are other options:

The Priority Order

1. 401(k) up to employer match — Free money first
2. HSA (if eligible) — Triple tax advantage, use for retirement
3. Max 401(k) — Get the full $23,500 in
4. Backdoor Roth IRA — Additional $7,000 tax-free growth
5. Taxable brokerage — No limits, but taxable

Account Comparison

Account	2026 Limit	Tax Treatment
401(k)	$23,500	Pre-tax or Roth
IRA	$7,000	Traditional or Roth
HSA	$4,300 (individual)	Triple tax-free
Taxable	Unlimited	Capital gains taxes

Your Action Plan

Here's what to do right now:

If You're Not Contributing

1. Log into your employer's benefits portal today
2. Set contribution to at least get the full employer match
3. Pick a target date fund if you're not sure about investments
4. Set a calendar reminder to increase contribution every January

If You're Already Contributing

1. Check that you're getting the full employer match
2. Review your investment choices and expense ratios
3. Consider increasing contribution rate by 1-2%
4. Evaluate traditional vs Roth allocation

If You're Maxed Out

1. Congrats—you're ahead of 95% of Americans
2. Check if your plan allows after-tax contributions (mega backdoor Roth)
3. Max out IRA and HSA
4. Consider taxable brokerage for additional savings

The Numbers Game

Here's what consistent 401(k) contributions look like over time (assuming 7% annual returns):

Monthly Contribution	After 10 Years	After 20 Years	After 30 Years
$500	$87,000	$262,000	$607,000
$1,000	$174,000	$524,000	$1.2M
$1,960 (max)	$341,000	$1.0M	$2.4M

Time is your biggest asset. Start now. Increase contributions gradually. Let compounding do the work.

Your future self will thank you.

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This is not investment advice. Consult with a financial advisor for personalized guidance. 401(k) investments can lose value. Past performance doesn't guarantee future results.