What is a 401k?
A 401(k) is an employer-sponsored retirement savings plan that allows employees to save and invest a portion of their paycheck before taxes are taken out. Taxes are paid when the money is withdrawn in retirement.
2024 401k Contribution Limits
- Employee Contribution: $23,000 (under age 50)
- Catch-up Contribution: Additional $7,500 (age 50+)
- Total Limit (including employer): $69,000 or $76,500 with catch-up
Understanding Employer Matching
Many employers offer matching contributions as an incentive. A common match formula is "50% match up to 6% of salary," which means:
- If you contribute 6% of your salary, your employer adds 3%
- This is essentially free money - always try to get the full match!
- Match formulas vary by employer (some offer 100% match)
Benefits of a 401k
- Tax-Deferred Growth: Your investments grow without being taxed until withdrawal
- Lower Taxable Income: Contributions reduce your current taxable income
- Employer Match: Free money that boosts your savings
- Automatic Saving: Contributions are deducted from your paycheck
- Higher Limits: Contribution limits are higher than IRAs
401k vs Roth 401k
- Traditional 401k: Pre-tax contributions, taxed at withdrawal
- Roth 401k: After-tax contributions, tax-free withdrawals
Tips for Maximizing Your 401k
- At minimum, contribute enough to get the full employer match
- Increase contributions by 1% each year
- Take advantage of catch-up contributions after age 50
- Review and rebalance your investments annually
- Avoid early withdrawals (10% penalty before age 59.5)
