You’ve probably heard the term “401(k)” bantered around the office lunchroom. Yes, you should get one. Maybe you should max it out? No, it’s not a savings account. So what is it and why is it considered an important part of a retirement plan? Here’s an overview, with some tips along the way.

What is a 401(k)?

A 401(k) is a retirement account offered by many employers, making it easier for you to save and invest for your future. With each paycheck, you can set aside money—often with valuable tax benefits—that’s invested and grows over time.

How do 401(k) plans work?

When you contribute to a 401(k), your money is invested in a portfolio managed by a fund manager. You can choose investments that match your risk tolerance and retirement timeline—whether you prefer aggressive growth or a more conservative approach.

The best part? You don’t pay taxes on your contributions right away. Instead, your money grows tax-free until you take it out in retirement, so your savings have more time to build up.

Example: Suppose Kiana earns $50,000 a year and contributes 5% ($2,500) to her employer’s 401(k). With twice-monthly paychecks, $104.17 is set aside from each check before taxes. At year’s end, her taxable income drops to $47,500, saving her $550 in federal taxes if she’s in the 22% bracket. In effect, she invests $2,500 for retirement, but it only costs her $1,950 out of pocket.

• 401(k) contributions aren’t taxed up front like regular income.
• You’ll pay taxes only when you withdraw the money in retirement.

How much are you allowed to contribute?

There are two types of contribution limits to your 401(k): on the maximum amount of salary deferral contributions per year, and the amount of total contributions per year—which includes contributions from both you as well as your employer.

Employee contribution limit in 2026:

• Ages 49 or younger: $24,500 (up from $22,500 in 2023)
• Ages 50 or older (including catch-up): $32,500 (up from $30,000 in 2023)
• Ages 60-63 "Super" Catch-Up: Additional $11,250 (Total $35,750, if plan allows)

Total contribution limit (employee + employer) in 2026:

• Ages 49 or younger: $72,000 (up from $66,000 in 2023)
• Ages 50 or older: $80,000 (up from $73,500 in 2023)
• Total Combined Limit (Ages 60-63): Up to $83,250 ($72,000 + $11,250)

What role does your employer play in your 401(k)?

Some companies may contribute additional money to your 401(k). There are three main types of employer contributions:

• Matching, where your company matches your contributions dollar-for-dollar up to a certain percentage
• Non-elective, which means your company will contribute a set percentage into everyone's 401(k), regardless of whether employees are putting their own money in
• Profit sharing, where money is contributed according to how much profit the company has earned in a given year

Generally speaking, it's wise to take advantage of any 401(k) matching program that your company offers. Keep in mind that matching contributions made by some employers may be subject to a vesting schedule, which means that money is only yours if you remain employed at that company for a set amount of time.

What if you leave your job?

If you leave your company or change jobs, you have a few options for your 401(k):

1. Leave your money in your former employer's plan. You'll be unable to further contribute to it and, if your previous company gets bought or switches 401(k) providers, it could be difficult to keep track of account numbers and login credentials.
2. Rollover your 401(k) balance to your new employer's plan. This may offer equal (or improved) investment choices and potentially lower fees.
3. Roll your 401(k) into an Individual Retirement Account (IRA), which operates similarly to a 401(k), except it isn't tied to an employer.

When do you need to start withdrawing money?

Once you reach age 73, you'll be required to start withdrawing money from your 401(k). These withdrawals are called Required Minimum Distributions (RMDs). If you’re still working for a company you don’t own, you may be able to delay taking RMDs. Missing an RMD comes with a steep penalty—50% of the amount you should have withdrawn, plus regular income tax.

It’s also important not to withdraw money too early. If you take funds out before age 59½, you’ll face a 10% early withdrawal penalty in addition to income tax, unless you qualify for certain exceptions.

Each year, you’ll receive a fee disclosure statement for your 401(k) plan. This document outlines any fees or charges associated with your account, helping you stay informed about the costs of managing your retirement savings.

Who gets the money if you pass away?

When you sign up for your 401(k), you’ll be asked to select a beneficiary who would receive the total funds in case of your death. If you’re married, federal law automatically establishes your spouse as beneficiary, unless they sign a waiver. If you’re single, the account goes to whomever you name as beneficiary. To ensure your wishes are met, include your retirement funds as part of your estate plan.

How does your 401(k) fit into your retirement plan?

At Bankoh Advisors, your 401(k) is just one component of a robust financial plan, including investments, insurance, estate plans and more. For a better idea of what might be right for you or for a second opinion on your current financial plan, schedule an appointment.

Resources

401(k) Resource guide:
401k resource guide | Internal Revenue Service

Contribution limits:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

Required Minimum Distributions (RMDs):
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

Early withdrawal penalties:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions

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