A 401(k) is an employer-sponsored retirement savings plan with special tax benefits designed to help you build wealth for the future. There are two types of 401(k) plans you can choose from:
a Traditional 401(k) and a Roth 401(k).
Here’s how it works: You contribute a portion of each paycheck into your 401(k), and that money is typically invested into mutual funds, index funds, or ETFs chosen by the employer.
Over time, as you continue to add more money and your investments grow, your retirement savings compound significantly.
One of the best features of a 401(k) is the employer match. Most employers will match a portion of what you contribute, and some even up to 6% of your salary. In fact, an estimated 98% of employers offer some level of matching. Not participating in your employer’s match is leaving free money on the table. 28% of people do not participate in their employer’s plan leaving free money behind.
Contribution Limits
If you’re under 50, the annual personal contribution limit is $23,500 (for calendar year 2025), and the total limit when combined with employer contributions is $70,000. If you’re 50 or older, you can make catch-up contributions, raising your personal limit to $31,000 and the combined limit to $77,500.
Traditional vs. Roth 401(k)
So, what’s the difference?
A Traditional 401(k) uses pre-tax income. This lowers your taxable income now, giving you an immediate tax break. However, when you withdraw money in retirement, those withdrawals are taxed as regular income.
A Roth 401(k) is the opposite. Contributions come from your after-tax income. You don’t get a tax break now, but when you withdraw the money in retirement, it’s completely tax-free—including your investment growth.
Withdrawal Rules
Generally, you must wait until the age of 59½ to withdraw money from your 401(k) without facing a 10% early withdrawal penalty. However, there are some exceptions. In emergency situations, some plans allow you to take out a loan or make hardship withdrawals without the penalty, depending on the specific rules of your plan.
The Power of Starting Young
If you decided to max out your 401(k) every year at the $23,000 limit, after 20 years, you could have over $1.5 million. After 30 years, your balance could grow to over $4.25 million, assuming consistent contributions and market growth. That’s the power of compound interest—and the
If you want to reduce the financial stress that often comes with retirement, maxing out your 401(k) as soon as possible is extremely beneficial. Now, maxing out doesn’t necessarily mean contributing the full $23,500. What it really means is contributing as much as you personally can afford—because every dollar you invest early makes a huge difference over time.
Special Circumstances - 401(k) and Divorce
Cristi Trusler, a Texas divorce attorney that we work with frequently, notes that if you divorce and need to divide a 401(k), you’ll usually need a Qualified Domestic Relations Order (QDRO). This court order tells the plan administrator how to split the account without triggering taxes or penalties. Each plan has its own rules, so it’s important to get the QDRO prepared correctly and approved before the funds are transferred. Without it, you risk extra costs or delays.
The key is to start as young as possible, take advantage of employer matching, and let compound growth work in your favor. Your future self will thank you.
Written by Diego Salinas and Jennifer Failla