What is the 401(k)?
A 401(k) is an employer-sponsored retirement account funded from pre-tax salary, so contributions reduce your taxable income now and grow tax-deferred until withdrawal. For 2026 the employee limit is $24,500, with an extra $8,000 catch-up contribution from age 50.
The single most valuable feature is the employer match — typically 3–6% of salary. It is an immediate 100% return on that portion, and failing to contribute enough to capture it fully is the most common and expensive retirement mistake in America.
Formula & worked example
Balance = (Balance + contributions) × (1 + return)
Worked example: $85,000 salary at 32, contributing 10% with a 4% match, $45,000 already saved, 7% returns and 3% raises. By 65 the balance reaches roughly $2.54 million — of which about $187,000 came from your employer's match alone, money you would forfeit entirely by contributing less than 4%.
How to use this 401(k) calculator
- Enter your gross annual salary.
- Set your contribution percentage — at minimum, enough to capture the full match.
- Enter the employer match percentage from your plan documents.
- Use 6–8% for a diversified portfolio; the S&P 500 has averaged about 10% nominal historically.
Smart tips
- Always contribute at least enough to get the full employer match — it is an instant 100% return you cannot beat anywhere else.
- Increase your contribution by 1% every time you get a raise; you will barely notice it and it compounds enormously.
- Check your fund expense ratios. A 1% fee difference can cost 25% of your final balance over 35 years.
- A Roth 401(k) makes sense if you expect a higher tax bracket in retirement; traditional wins if you expect lower.
- Never cash out a 401(k) when changing jobs — roll it over. Withdrawals before 59½ incur income tax plus a 10% penalty.
Frequently asked questions
How much should I contribute to my 401(k)?
At minimum enough to capture the full employer match. Aim for 15% of gross salary including the match for a comfortable retirement.
What is the 401(k) contribution limit for 2026?
$24,500 for employees under 50, with an additional $8,000 catch-up contribution allowed from age 50.
What happens to my 401(k) if I change jobs?
You can leave it, roll it into your new employer's plan, or roll it into an IRA. Rolling over preserves tax deferral; cashing out triggers tax and a 10% penalty before 59½.
Traditional or Roth 401(k)?
Traditional reduces taxes now and is taxed on withdrawal. Roth is taxed now and tax-free later. Choose Roth if you expect to be in a higher bracket in retirement.
Want the theory behind the numbers? Read our retirement guides on the Money Blog.
Written by Gurjeet Singh, Sharpen Solutions. Last reviewed 15 Oct 2026. Sources: IRS — 401(k) elective-deferral and catch-up limits. How we check these numbers.