401(k) basics: the easy retirement win
A 401(k) is one of the most generous deals in personal finance. Here's what it actually is, how matching works, and what to do if your employer offers one.
What it is
A 401(k) is a retirement account offered through your employer. You contribute pre-tax (or Roth post-tax) dollars from each paycheck, and the money grows tax-advantaged until you retire. The IRS sets a contribution limit each year.
The employer match is free money
Many employers will match a percentage of your contributions. A common match is 50% of contributions up to 6% of your salary. That match is literally part of your compensation. If you don't capture it, you're leaving money on the table.
- Check your benefits portal for the exact match formula
- Contribute at least enough to capture the full match
- Match dollars vest. They may not be fully yours until you've worked there a certain number of years
Traditional vs. Roth 401(k)
Traditional contributions reduce your taxable income today; you pay taxes on withdrawals in retirement. Roth contributions are taxed today; withdrawals in retirement are tax-free. If you expect to be in a higher tax bracket later, Roth often wins.
What to invest in
Most plans offer target-date funds that automatically shift from stocks to bonds as you near retirement. They're a fine default. If you want to customize, low-cost index funds across US stocks, international stocks, and bonds are a common foundation.
Are you capturing the full match?
Most employer matches are the highest-return move in personal finance. Find out if you're leaving any on the table.
of your contribution
% of salary
You contribute
$2,400
Per year
Employer adds
$1,200
Missing $1,200
30-yr projection
$365,991
vs $731,983 if maxed
Your contribution vs the match window
Insight
You're leaving $1,200 of free employer money on the table this year. Bump your contribution to 6% and you'll capture the full match.