Today, more than 70 million Americans participate in 401(k) plans, and have almost $9.3 trillion invested through them—making 401(k)s one of the most widely used retirement savings vehicles in the country. For many employees, a 401(k) serves as the foundation of their retirement strategy.

Here’s what you need to know about how 401(k) plans work, how much you can contribute in 2026, and how these plans fit into your broader financial goals.

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement savings plan that allows you to contribute directly from your paycheck. It is a defined contribution plan, meaning your retirement balance depends on how much you contribute and how your investments perform.

Traditional (Pretax) 401(k) Contributions

When you contribute pretax dollars:

• Your contributions reduce your taxable income
• You do not pay income taxes on contributions or earnings until withdrawal
• Withdrawals are taxed as ordinary income

Example

If you earn $130,000 and contribute 10% ($13,000) pretax to your 401(k), your taxable income is reduced to $117,000. You defer taxes on that $13,000 until you withdraw it in retirement.

Roth 401(k) Contributions

With Roth contributions:

• Contributions are made after tax
• Qualified withdrawals are tax-free
• No immediate tax reduction

A distribution is considered qualified if:

• At least 5 years have passed since your first Roth contribution, and
• You are 59½, disabled, or deceased

Most 401(k) plans allow you to choose a mix of pretax and Roth contributions.

Investment Choices

Most plans allow you to direct your own investments from a menu of options (such as target-date funds, mutual funds, and index funds). Choosing investments aligned with your retirement goals is an essential part of using your 401(k) effectively.

When Can I Contribute to a 401(k)?

You can contribute as soon as you meet your plan’s eligibility rules. Some plans require up to one year of service, while others offer immediate eligibility.

Many employers also use automatic enrollment, where you’re automatically enrolled at a default contribution rate—unless you actively change or opt out. If your plan uses auto-enrollment, double-check:

• The default contribution rate
• The default investment selection
• Whether adjustments are needed for your situation

How Much Can I Contribute to My 401(k) in 2026?

Employee Contribution Limits (2026)

• $24,500 elective deferral limit
• $8,000 catch-up contribution (age 50+)

This means workers age 50 or older can contribute up to $32,500.

Total Contribution Limit (Employee + Employer)

• Up to $72,000 (or $80,000 if age 50+ and using catch-up contributions)*
  *Catch-up contributions do not count toward the $72,000 limit

If you contribute to more than one 401(k), 403(b) or similar plan in a year, your combined elective deferrals generally can’t exceed the $24,500 limit for 2026. SIMPLE plans have separate, lower limits.

Can I Also Contribute to an IRA?

Yes. Participating in a 401(k) does not prevent you from contributing to an IRA.

2026 IRA Contribution Limits

• $7,500 (under age 50)
• $8,600 (age 50+)

However, your ability to deduct contributions to a traditional IRA may be limited depending on:

• Your income
• Whether you or your spouse is covered by a workplace retirement plan

Roth IRA contributions are also subject to income limits.

What Are the Tax Advantages of 401(k) Contributions?

Traditional 401(k)

• Taxable income is reduced in the year you contribute
• Contributions and investment earnings are taxed at withdrawal

Roth 401(k)

• No upfront tax break
• Qualified withdrawals are tax-free
• Five-year rule applies

Your choice between pretax and Roth depends on:

• Your current vs. future expected tax bracket
• Your income level
• How long until retirement
• Your broader financial plan

Both can be valuable tools—and many savers benefit from contributing to both.

What About Employer Contributions?

Employers may match or make non-elective contributions. These contributions:

• Are always made pretax, even if matching Roth contributions
• Are taxable to you upon withdrawal
• May be subject to a vesting schedule of up to 6 years

Your contributions (pretax or Roth) are always 100% vested immediately.

What Happens to My 401(k) When I Leave My Job?

When you separate from your employer:

• You keep your vested balance
• You may have to forfeit unvested employer contributions
• If your account balance exceeds $5,000, you can generally leave it in the plan
• You may roll over your account to an IRA or another employer plan tax-free

What Else Should I Know About My 401(k)?

Loans

Some plans allow loans up to:

• 50% of your vested balance
• Maximum $50,000

Loans must be repaid with interest, typically within 1–5 years.

Hardship Withdrawals

Some plans permit hardship withdrawals for immediate financial needs. These withdrawals:

• Are taxable (except Roth contributions)
• May be subject to a 10% penalty if you’re under age 59½
• Should generally be considered a last resort

Saver’s Credit

Depending on your income, you may qualify for a federal tax credit for contributing to a retirement plan.

Creditor Protection

401(k) assets are generally protected under federal law in cases of bankruptcy.

What This Means for You

A 401(k) is one of the most effective tools for long-term retirement planning. Contributing consistently—and taking full advantage of employer contributions—can significantly strengthen your financial future.

If you’d like help optimizing your 401(k) strategy or aligning it with your broader financial plan, Navalign Wealth Partners is here to guide you. Our fiduciary advisors can help you make informed decisions that support your long-term goals.