Your 401(k) doesn’t have to be a mystery
A 401(k) is a retirement account offered through an employer. Here’s how they work:
- You contribute money from your paycheck
- Your employer may add matching contributions
- You choose investments from the options in your plan
- Your balance can grow as those investments change in value
Your employer sets many of the plan’s rules. This includes whether it offers matching contributions, Roth contributions, or automatic enrollment. Every plan can be different.
How do you contribute to a 401(k)?
When you enroll, you choose how much money to contribute from each paycheck. Your plan may let you select a percentage of your pay or a set dollar amount.
Let’s say your pay is $2,000 before taxes, and you choose to contribute 5%. That means $100 goes into your 401(k).
You can usually change your contribution through your workplace benefits website or 401(k) provider. The provider is the company that manages the account. You may find its name on your pay stub, benefits website or account statement.
Changes aren’t always immediate. After a paycheck or 2, check your pay stub. Make sure the amount coming out matches what you selected. Done and done.
How does an employer match work?
Some employers will match a portion of your contributions.
Every plan can set its own matching formula.
Here’s one common example:
Your employer matches what you contribute, up to 5% of your pay.
What does that actually mean?
- Contribute 2% of your pay, and your employer adds 2%
- Contribute 5%, and your employer adds 5%
- Contribute 6% or more, and your employer adds the maximum 5%
In this example, you would need to contribute 5% to receive all the matching money available to you. We recommend you contribute at least enough to get your employer match.
An employer match can give your savings a nice boost. However, your employer's match may come with a vesting schedule.
What does vesting mean?
The money you contribute from your paycheck is always yours. Its value can still rise or fall with your investments, but your employer can’t take your contributions back.
Employer contributions may work differently. Some belong to you immediately. Others become yours gradually as you work for the employer on their vesting schedule.
Your account may show 2 balances:
- Total balance: Everything currently in the account
- Vested balance: The amount that belongs to you if you leave today
You can usually find the vesting schedule on your benefits website or in the plan’s Summary Plan Description. That document explains how your workplace plan works. Before changing jobs, check the schedule. A few more months at work could affect how much of the employer match you keep.
Read External Link: IRS Vesting Guidance
How much should you contribute?
There isn’t one perfect percentage for everyone. Start with an amount that works with your budget.
If your employer offers a match, find out how much you would need to contribute to receive the full amount. You can calculate what your take home pay looks like after that contribution and check it against your other spending.
Can’t contribute enough to receive the full match yet? Start small. A contribution you can keep making is more useful than an ambitious amount that leaves you short before payday.
When you receive a raise, consider increasing your contribution. Your take-home pay can still go up while part of the raise begins building your retirement savings. Future you gets a raise too.
Read: Budgeting 101
How much can you contribute each year?
The IRS limits how much an employee can contribute each year. This is the maximum allowed, not the amount you’re expected to save.
For 2026:
- The general employee contribution limit is $24,500
- The general catch-up contribution limit for people age 50 or older is $8,000
- People ages 60 through 63 may qualify for a higher catch-up contribution limit of $11,250
Most people won’t reach these limits. If you’re getting close, review the current IRS rules and confirm how your plan handles contributions.
Read: IRS 401(k) contribution limits
Traditional or Roth: When do you want to pay income taxes?
401(k) contributions come in two flavors, traditional and Roth. The main difference is when you pay federal income taxes on the money.
Traditional 401(k)
Traditional contributions are pre-tax, meaning the money goes into your 401(k) without being taxed. This may lower the amount of income used to calculate your federal income tax today.
For example, say you earn $2,000 and make a $100 traditional contribution. Federal income tax may be calculated using $1,900 of that pay instead of the full $2,000.
You generally pay federal income tax when you withdraw the money later.
Roth 401(k)
Roth contributions come out after federal income tax is calculated. This means you pay federal income tax on that income now.
If a withdrawal is qualified, you generally won’t owe federal income tax on the money you contributed or its investment earnings.
Under IRS rules, a qualified withdrawal generally requires you to have participated in the Roth account for at least 5 tax years. The withdrawal must also be made after you reach age 59½, become disabled or die.
Can you choose both?
Your plan may let you divide your contributions between traditional and Roth. If you do, the annual employee contribution limit applies to the combined total. Neither option is automatically better. The choice depends on your tax situation, the options offered by your employer and what you expect your finances to look like later.
What happens after the money reaches your account?
Putting money into a 401(k) is only the first part. That money also needs to be invested.
Most workplace plans give you a menu of investment funds. You choose from that menu instead of searching through every investment available. The choices vary by employer.
If you were automatically enrolled, the plan may have selected a default investment for you. That gets the account moving, but it doesn’t mean the contribution amount or investment fits your situation.
Sign in to your account and check:
- Where your current balance is invested
- Where future contributions will go
- How much the investments may rise or fall
- What fees they charge
In some accounts, the money already saved and future contributions can be directed differently. If you make a change, read the instructions carefully to see whether it affects one or both.
Investment risk is the chance that an investment will lose value. Some investments tend to move up and down more sharply than others. Check how much risk an option carries and whether its expected retirement timeline matches yours.
Your account balance will change over time. A drop doesn’t always mean something has gone wrong. Investments move with the market, and a 401(k) is generally meant for long-term retirement saving.
What 401(k) fees should you check?
Investment funds cost money to manage. An expense ratio is the annual cost of operating a fund. It is shown as a percentage.
You usually won’t receive a separate bill. The cost is taken from the fund’s returns.
For example, a 0.50% expense ratio equals about $5 a year for every $1,000 invested. The actual cost will change as the value of your investment changes.
You can usually find the expense ratio in:
- Your plan’s investment comparison chart
- A fund fact sheet
- The plan’s fee disclosure
- The investment details inside your online account
Your plan may also charge administrative or service fees for maintaining the account.
Fees aren’t automatically bad. Funds and workplace plans have costs to operate. However, fees reduce how much of an investment’s return stays in your account. That makes them worth comparing.
The lowest-cost option isn’t always the right fit. Look at the fee along with what the fund holds, how much its value may change and whether it fits your expected retirement timeline.
Give your 401(k) a quick checkup
Already enrolled? Great. Now make sure the account is doing what you think it is.
- Check your pay stub: Confirm that money is coming out and the amount is correct
- Review the employer match: Find out how much you need to contribute to receive the full available match
- Check your vesting: Learn how much of the employer contribution currently belongs to you
- Find your investments: See where your current balance and future contributions are going to be invested
- Review the fees: Look at investment expenses and other account charges
- Add a beneficiary: Name the person or organization that should receive the account after your death
- Secure the account: Use a strong password and turn on multi-factor authentication if it’s available
Multi-factor authentication is an extra login security step, such as a temporary code. It can help protect your account if someone gets your password.
Automatic enrollment doesn’t replace this checkup. It may start your contributions and select an investment. It can’t decide whether those settings fit your budget, goals or retirement timeline.
What happens to your 401(k) when you leave a job?
You don’t lose your 401(k) when you leave. Your contributions and the vested portion of your employer’s contributions always belong to you.
Depending on your plan rules and vested balance, your choices may include:
- Leaving the money in your former employer’s plan
- Moving it into a new employer’s plan if that plan accepts rollovers
- Moving it into an individual retirement account, or IRA
- Withdrawing the money
An IRA is a retirement account you open outside an employer’s workplace plan. It isn’t part of your 401(k), but you can contribute to it just like you do to your 401(k).
If you withdraw the money from your 401(k) and you are under 59.5 years old, generally you pay a 10% penalty on the balance and income taxes. So be cautious before you withdraw those funds.
What is a rollover?
A rollover moves retirement savings from one eligible retirement account to another. It can help you keep the money in a retirement account when you change jobs.
With a direct rollover, the money goes from your old account to the new one instead of being paid to you first. This can help you avoid tax withholding and other complications that may arise when the money is sent directly to you.
Once the rollover is complete, check the new account. The money may arrive as cash instead of being placed in an investment fund.
If it remains in cash, it won’t have the opportunity to grow like your other investments.. You may need to choose investments separately.
What if you withdraw the money instead?
A withdrawal may be subject to federal income tax. If you’re younger than 59½, an additional 10% penalty may also apply.
The IRS allows exceptions in certain situations. These may include some distributions related to disability, death or leaving an employer during or after the year you turn 55. The rules are specific, and not every exception applies to every retirement account.
Once withdrawn, the money is no longer invested in the account and may miss future growth.
Before deciding, review your plan rules and consider talking with a qualified tax or financial professional.
Can you use 401(k) money before retirement?
Some plans allow loans or hardship withdrawals. These options work differently, and neither should be treated like an ATM with extra paperwork.
A 401(k) loan lets you borrow from the account and repay the money over time. The interest you pay on a 401(k) loan goes back into your plan. If you leave your job or don’t repay the loan as required, the unpaid amount may be treated as a taxable distribution. An additional tax may apply.
A hardship withdrawal permanently removes money for a qualifying financial need. The distribution may be taxable. You can’t repay it to the plan as though it were a loan.
Either choice can leave less money invested for retirement. Before moving forward, find out:
- Whether your plan allows the transaction
- How taxes and fees may apply
- What happens if you leave your job
- How the decision could affect your retirement savings
Written April 2026
Written by the Numerica Financial Education Team: Helping members grow their money across Spokane, North Idaho, Wenatchee, and the Tri-Cities.
