So, What Is a 401(k)?

A 401(k) is a retirement savings account you get through your employer. It lets you put aside a portion of each paycheck for the future before you get taxed.

If you do nothing else for retirement, contributing to your 401(k) is one of the easiest and most effective things you can do.

But Why Is It Called a 401(k)?

The name “401(k)” comes from a subsection of the IRS tax code, literally Section 401, paragraph (k). But what matters is what it allows: employees to save for retirement with huge tax advantages.

How a 401(k) Works

1. You choose how much to save.

For 2026, the 401(k) contribution limit is $24,500, and you can decide what you want to contribute up to that amount. This money goes straight into your 401(k) before taxes. Most people start around 4% or 5% and work their way up to 15%, when they can. Even if you can only contribute 1% or 2%, your future self will thank you.

2. The money gets invested.

Depending on the plan your employer has created, you have to make sure your contributions don’t just sit in an account and that they’re being invested in things like index funds, target date funds, bonds, and stocks. When I first opened my IRA, I didn’t realize there was a second step and my money just sat in what is basically a money market account. 

3. Your employer might give you free money.

A lot of companies offer a 401(k) match, which means they’ll contribute to your account, too. Usually, it’s something like “up to 4%.” If you contribute 4%, they contribute 4%. Free. Money. If you can meet your match, I would definitely recommend it, otherwise you’re leaving money on the table and losing out on some of your employer benefits.

4. You don’t pay taxes right now.

Traditional 401(k)s use pre-tax contributions, meaning you lower your taxable income today. You’ll pay taxes later when you withdraw the money in retirement, ideally when you’re in a lower tax bracket.

(Some employers also offer a Roth 401(k) which is the opposite: you pay taxes now and enjoy tax-free withdrawals later.)

5. You usually can’t take the money out early.

This money is for retirement, so the IRS wants their cut. Taking money out before age 59½ can come with penalties and taxes. But in an emergency, some plans offer loans or hardship withdrawals.

Why a 401(k) Is Such a Big Deal

Even if you feel behind or don’t make a ton yet, here’s why starting matters:

It’s automatic savings for when you retire. Your future self gets paid every time you get paid.

It can come with free employer money. Not taking the match is like leaving part of your salary with your employer.

Time does most of the work. The earlier you start, the more compounding makes even small contributions grow.

It builds financial stability. 401(k)s are one of the most common (and sometimes only) ways Americans build retirement wealth.

How Much Should You Contribute?

There’s no right answer, but here’s a simple rule of thumb:

• Always contribute enough to get your full employer match
• Have a goal of 10–15% of your income over time (including the match)
• If this isn’t possible right now, start small and increase 1% each year.

Your future self will thank you.