401(k)
An employer-sponsored retirement savings plan that lets you contribute pre-tax income (or after-tax with Roth 401(k)). The 2025 employee contribution limit is $23,500.
A 401(k) is a tax-advantaged retirement savings plan offered by employers. Employees can contribute a portion of their salary — up to $23,500 in 2025 — on a pre-tax basis, meaning contributions reduce your taxable income in the year they are made. Withdrawals in retirement are taxed as ordinary income.
Many employers match a portion of your contributions, commonly 50% to 100% of the first 3% to 6% you contribute. Employer matches are essentially free money and represent an immediate 50% to 100% return on your contribution. The combined employee and employer contribution limit for 2025 is $70,000.
Workers age 50 and older can make catch-up contributions of an additional $7,500 in 2025. Many plans also offer a Roth 401(k) option, where contributions are made with after-tax dollars but qualified withdrawals in retirement are entirely tax-free. Choosing between traditional and Roth depends largely on whether you expect your tax rate to be higher or lower in retirement.
How it works
A 401(k) is an employer-sponsored retirement plan that lets you defer part of your salary into an investment account, either pre-tax (traditional) or after-tax (Roth). Pre-tax contributions reduce your taxable income in the year you make them, and the money grows tax-deferred until you withdraw it in retirement, when withdrawals are taxed as ordinary income. For 2025, employees can defer up to $23,500 of their own salary into the plan.
Your contribution rate is set through payroll — you choose a percentage or dollar amount on your plan enrollment, and it comes out of each paycheck automatically before you ever see the money, which shows up as a reduction in your taxable wages on your W-2 for traditional contributions. Many employers add a match, commonly 50% to 100% of the first 3% to 6% you contribute, which is essentially a guaranteed return on top of whatever your investments earn.
The combined limit on employee deferrals plus all employer contributions is $70,000 for 2025, far above what most employees personally contribute, leaving substantial room for employer matches and profit-sharing. Workers 50 and older can add a catch-up contribution of $7,500 on top of the $23,500 base limit. A common mistake is not contributing at least enough to capture the full employer match — walking away from free money — or forgetting that early withdrawals before age 59½ generally trigger both income tax and a 10% penalty.
Example: employee deferral plus employer match
An employee earning $90,000 contributes 10% of salary to their 401(k), or $9,000 for the year — well under the $23,500 employee limit for 2025. Their employer matches 50% of contributions up to 6% of salary, which comes to $2,700 (50% of the $5,400 in salary they've deferred toward that 6% tier).
Combined, $9,000 from the employee plus $2,700 from the employer puts $11,700 into the account for the year, still comfortably under the $70,000 combined employee-and-employer limit that applies for 2025.
Frequently asked questions
How much can I contribute to my 401(k) in 2025?
What's the difference between a traditional and Roth 401(k)?
What happens if I withdraw from my 401(k) early?
Related Terms
Traditional IRA
An individual retirement account where contributions may be tax-deductible and investments grow tax-deferred. The 2025 contribution limit is $7,000 ($8,000 if age 50+).
Roth IRA
A retirement account funded with after-tax dollars. Qualified withdrawals in retirement — including all growth — are completely tax-free. The 2025 contribution limit is $7,000 ($8,000 if 50+).
Employer Match
A contribution your employer makes to your 401(k) or similar retirement plan based on how much you contribute, often matching 50% to 100% of the first 3% to 6% of your salary.
Catch-Up Contribution
Additional retirement plan contributions allowed for workers age 50 and older — $7,500 extra for 401(k) plans and $1,000 extra for IRAs in 2025.