401(k) Retirement Plans

Some plans allow additional after-tax contributions beyond the standard employee contribution limit, subject to an overall annual plan limit set by the IRS. These contributions are made with after-tax dollars, and while the contributions themselves are not taxed again when withdrawn, any investment earnings are generally taxed as ordinary income. However, doing a Roth conversion on these after-tax contributions is a popular option, commonly referred to as a “back door Roth”. The availability, limits and treatment of after-tax contributions vary by plan and can be complex. Since most savers contribute below the standard contribution limit, this option is more commonly utilized by higher-income earners. A tax or financial professional can help you understand how this option may fit within your overall retirement strategy. 

How Does a 401(k) Retirement Plan Work?

A 401(k) plan is designed to support long-term retirement saving by allowing contributions to grow within a tax-advantaged structure over time. How much is contributed, how those contributions are invested and how taxes apply all influence how the account may grow and the role it can play in retirement income planning.

Here’s a breakdown of the primary elements involved:

Employee Contributions

Employee contributions are typically deducted automatically from each paycheck and deposited into the participant’s 401(k) account. Participants generally choose either a fixed dollar amount or a percentage of their compensation to contribute.

Depending on the employer’s plan design, employees may be able to direct contributions to a traditional 401(k), a Roth 401(k) or both. Some plans also allow after-tax (non-Roth) contributions, which follow separate IRS rules and are subject to an overall plan contribution limit that includes employee and employer contributions. The availability of these options vary by plan, making it important to understand how your specific plan is structured.

Employee Contribution Limits

The Internal Revenue Service (IRS) sets limits on how much you can contribute to a retirement plan. 401(k) plans have both annual employee-contribution and company-match limits. The annual limit for employee contributions for qualified plans is $24,500 for 2026.ⁱ

For those over age 50, the IRS allows additional contributions of $8,000 per year—called “catch-up” contributions.ⁱⁱ Meanwhile, those aged 60 to 63 have a higher catch-up contribution limit of $11,250. This brings the total possible employee contribution up to $35,750.ⁱⁱⁱ This maximum contribution amount often increases to keep pace with inflation, so it is a good idea to check this annually on the IRS website. 

Employer Contribution Matching

Many employers offer a 401(k) match, meaning the employer contributes money in addition to your 401(k) contribution. This is a major benefit of 401(k) plans. Some of the most common match methods include:

• Percentage match: Employers match a worker’s contributions to a certain percentage of their salary, often between 3% and 6%. That means the employer would contribute up to 3% to 6% of the employee’s salary as long as the employee contributes that much. For instance, a 6% contribution with a 6% match would essentially double your savings rate.
• Dollar-amount match: Some employers will match employee contributions by a specified dollar-for-dollar value.
• Stretch match: The employer stretches the offering to encourage employees to contribute more. For example, instead of matching 100% of your contributions up to 3% of your salary, the company stretches to contribute 50% of your contributions up to 6% of your salary. This means the employer contributes the same dollar amount, but you have to commit to a higher contribution rate to take full advantage of the match.

Employer contributions are often subject to a vesting schedule, so the funds they contribute will only become part of your retirement asset base if you stay with the company for a certain length of time. Once the vesting period is over, employees can keep the employer’s contributions even if they leave the company.

Planning Your Contribution Amounts

Many people focus on contributing enough to receive the full employer match, since matching contributions can meaningfully increase retirement savings. While that is often a good starting point, contribution decisions are ultimately more effective when they are tied to long-term retirement goals rather than a single benchmark.

How much you need to contribute depends on several factors, including when you start saving, your income level, expected retirement spending and how long your portfolio is expected to support withdrawals. An investor who begins saving early and has modest income needs in retirement may not need to maximize contributions each year. Conversely, higher earners or those with more ambitious retirement goals may need to contribute more—sometimes up to annual limits—and may also need to save in additional accounts outside a 401(k).

It’s also important to balance retirement saving with near-term financial needs. Because access to 401(k) assets is generally restricted before retirement, many investors maintain other savings alongside their workplace plan to cover unexpected expenses or shorter-term goals. Evaluating contribution levels in the context of both long-term objectives and current cash-flow needs can help ensure a strategy that is sustainable over time.

Investment Choices

Most 401(k) plans offer a lineup of investment choices selected by the plan sponsor. These commonly include mutual funds, target-date funds, bond funds or professionally managed options. Participants decide how their contributions are allocated among the investments available within the plan.

Some 401(k) plans allow a broader range of investment flexibility, including access to individual securities or more specialized strategies. While this additional choice can increase customization, it can also introduce higher complexity and risk. Investments such as individual stocks or more advanced instruments may amplify both gains and losses and often require a greater level of understanding to manage effectively. The scope of available investments depends entirely on how the plan is structured.

Regardless of the lineup, individual investments are not inherently diversified. A single fund or security may be concentrated in a specific asset class, sector or geographic region. Diversification generally involves combining securities that respond differently to changing market conditions.

All investments involve risk, and investment results within a 401(k) plan are not guaranteed. Account values can rise or fall over time based on market conditions.

Withdrawals, Penalties and RMDs

401(k)s usually have penalties for early withdrawals, though some exceptions may apply depending on the situation. For traditional 401(k) retirement plans, this penalty is in addition to ordinary income tax on withdrawals taken before age 59 ½.

Once you have reached that age, you may begin taking money from your account penalty-free. However, you are not required to take distributions until you reach your required minimum distribution (RMD) age, which depends on your birth year. Under current IRS rules, RMDs generally begin at age 73 for individuals born between 1951 and 1959 and at age 75 for those born in 1960 or later.^iv Once RMDs begin, a minimum amount must be withdrawn each year based on IRS life expectancy tables.    

RMD rules are intended to ensure that tax-deferred retirement savings are eventually distributed and taxed. Failing to take the required amount can result in significant penalties, which is why understanding timing and withdrawal requirements is an important part of retirement planning.

401(k) Loans

Some 401(k) plans allow participants to borrow against their account balance, though this option is not available in all plans. When permitted, loans must be repaid with interest within a set timeframe, often five years.

Because the interest on a 401(k) loan is generally paid back into your own account, borrowing does not automatically eliminate growth the way paying interest to a bank does. However, the trade-offs depend on market conditions during the loan period. If markets perform strongly during the life of the loan, loan interest may not fully offset the missed investment gains. If markets decline, repaying the loan with interest may compare more favorably.

The more significant risks tend to be behavioral and structural. Repeated borrowing can create the habit of viewing retirement savings as a short-term funding source rather than a long-term plan. In addition, if employment ends before the loan is repaid, the outstanding balance may become due quickly. If it is not repaid, it can be treated as a distribution and subject to income taxes and potential penalties.

In some situations, a 401(k) loan may be preferable to high-interest debt, since the interest paid goes back into the account rather than to a lender. Evaluating whether a loan makes sense depends on the alternatives available, market conditions and the role the 401(k) plays in your broader retirement strategy.

Because of these risks, 401(k) loans are generally considered only after other options have been exhausted. It’s best to consult a qualified tax or financial professional before proceeding.

What Happens to Your 401(k) When You Leave a Job?

When you retire or move to another company, you generally have several options for your 401(k) retirement plan:

• Start a new plan: Depending on the employer and the requirements of their retirement plans, you may be able to open a new 401(k) account at your new job while keeping your existing account where it is. This would give you multiple tax-deferred accounts, which isn’t a problem because workers generally can have multiple retirement plans simultaneously at any point.
• Roll over your account: Instead of keeping your account with your existing custodian or moving it into a new employer’s plan, you can roll your 401(k) retirement plan assets into an individual retirement account (IRA). Or, if your new employer sponsors a 401(k) retirement plan, you can usually transfer your existing account there, either all at once or over time. This does not change the tax treatment of the funds.
• Close your account: You can close your account and have the funds sent to you as a lump-sum withdrawal. However, you would be required to pay any applicable taxes and penalties.

How Does a Rollover Work?

There are two methods for rolling over your 401(k) if your plan permits it.

• Option One: Your 401(k) plan administrator directly transfers the money to another retirement plan or to an IRA.
• Option Two: If your 401(k) plan administrator issues your distribution in the form of a check, you will have 60 days to deposit the check into a new retirement account. If you don’t deposit it in your new retirement plan account or IRA within 60 days, the full distribution amount may be subject to ordinary income tax and potentially a 10% early withdrawal penalty if you are under age 59 ½^v.

Importantly, if the check is made payable directly to you, it will be subject to a mandatory 20% withholding, even if you intend to roll it over^vi. However, you can typically avoid that mandatory withholding by having the check made payable directly to the receiving plan or IRA account.

Comparing 401(k)s and Individual Retirement Accounts

Both 401(k) plans and IRAs are designed to support long-term retirement planning, but they play different roles within an overall strategy. The comparison below focuses on how IRAs differ—and when they are commonly used alongside workplace plans.

401(k) vs. IRA: Key Differences at a Glance

Understanding how these accounts differ can help place each within the broader context of retirement planning, especially when considering contribution limits, tax treatment and long-term saving capacity.

Learn More About Retirement Planning

A 401(k) is just one component of a comprehensive retirement plan. Exploring how workplace retirement plans, personal savings and long-term income needs fit together can help provide greater clarity as retirement approaches.

Download the Guide to Retirement Income to learn more about planning for retirement, or request an appointment with Fisher Investments to discuss your specific questions.

This article is for informational and educational purposes only and should not be construed as investment advice or a recommendation regarding any particular investment strategy or course of action. The information presented is general in nature and does not take into account the individual circumstances, objectives, or financial situation of any specific investor. We provide our general comments to you based on information we believe to be reliable. There can be no assurances that we will continue to hold this view; and we may change our views at any time based on new information, analysis or reconsideration. Some of the information we have produced for you may have been obtained from a third-party source that is not affiliated with Fisher Investments.

Fisher Investments has no duty or obligation to update the information contained herein.

¹ Source: Internal Revenue Service, as of 1/29/2026. 2026 Contribution Limits.

² ibid

³ ibid

⁴ Source: Internal Revenue Service, as of 1/29/2026. Required Minimum Distribution FAQs.

⁵ Source: Internal Revenue Service, as of 3/23/2026. Exceptions to Tax on Early Withdrawal Penalties.

⁶ Source: Internal Revenue Service, as of 3/23/2026. Rollovers of Retirement Plan and IRA Distributions.