If you have a job with benefits, you have probably been offered a 401(k). It is one of the most common ways Americans save for retirement. But many people sign up for one without fully understanding what it is.
What a 401(k) Is
A 401(k) is a retirement savings account offered by your employer. You contribute money from your paycheck before taxes are taken out (in a traditional 401(k)), and the money grows tax-deferred until you withdraw it in retirement.
The name comes from Section 401(k) of the Internal Revenue Code. Not the most exciting origin story.
How It Works
You choose how much to contribute. Usually a percentage of your paycheck. In 2026, the maximum contribution is $23,500 per year (or $31,000 if you are 50 or older).
Your employer may match. Many employers will match a portion of your contribution. For example, they might match 50% of what you contribute up to 6% of your salary. This is essentially free money.
You choose your investments. Most 401(k) plans offer a menu of mutual funds, index funds, and target-date funds. You decide how to allocate your contributions.
The money grows tax-deferred. You do not pay taxes on the gains until you withdraw the money in retirement.
Traditional vs Roth 401(k)
Traditional 401(k): Contributions are made before taxes. You pay taxes when you withdraw in retirement. This reduces your taxable income now.
Roth 401(k): Contributions are made after taxes. Withdrawals in retirement are tax-free. This means you pay taxes now but not later.
Which is better depends on whether you expect your tax rate to be higher or lower in retirement. Many people use a mix of both.
Employer Matching
If your employer offers matching contributions, this is the single most important thing to understand about your 401(k).
If your employer matches 100% up to 3% of your salary, and you earn $60,000, contributing at least $1,800 per year (3%) gets you an additional $1,800 from your employer. That is a 100% return on that portion before any market growth.
Not contributing enough to get the full match is leaving free money on the table.
When You Can Withdraw
Generally, you can withdraw from a 401(k) without penalty after age 59 and a half. Withdrawing earlier usually triggers a 10% early withdrawal penalty plus income taxes (with some exceptions for hardship).
Required minimum distributions (RMDs) start at age 73, meaning you must begin withdrawing a minimum amount each year.
Common Mistakes
- Not contributing enough to get the full employer match
- Leaving the default allocation without checking what it is
- Cashing out when changing jobs instead of rolling it over to an IRA or new employer plan
- Not increasing contributions over time as your salary grows
The Bottom Line
A 401(k) is not complicated once you understand the basics. Contribute enough to get the full employer match, choose a diversified allocation, and increase your contributions as your income grows.
The Progressive Trailblazer includes a Retirement Calculator to help you model different savings scenarios. Educational only. Not financial advice.