How Does a 401(k) Work?
A 401(k) is an employer-sponsored retirement savings plan that allows you to contribute pre-tax dollars from your paycheck. Many employers offer matching contributions, essentially giving you free money. In 2026, the contribution limit is $23,500 ($31,000 if you're 50+).
Why Employer Match Matters
If your employer matches 50% of contributions up to 6% of salary, and you earn $75,000 contributing 6%, your employer adds $2,250/year. Over 30 years at 7% returns, that match alone grows to over $213,000.
Key 401(k) Strategies
- Always get the full match — it's a 50-100% instant return
- Increase contributions with raises — bump 1% each year
- Choose low-fee index funds — a 1% fee difference costs $100K+ over 30 years
- Consider Roth 401(k) — pay taxes now, withdraw tax-free later