401(k) Basics: Matching, Contributions and Mistakes to Avoid

Mia is 25 and just started her first real job at $55,000 a year. Somewhere in the onboarding packet, between the parking pass and the harassment training, was a form asking her to “elect a deferral percentage.” She picked 3% because it sounded responsible and didn’t hurt.

That one checkbox will probably matter more to her future than any car, apartment or raise she’ll get in the next decade. Here’s how a 401(k) works, what the match really is, and the mistakes that quietly cost people six figures.

How a 401(k) works

A 401(k) is a retirement account your employer offers through payroll. The basics:

• You choose a percentage of each paycheck to contribute. It comes out automatically before the money hits your checking account.
• You pick investments from a menu the plan offers. Many plans default new employees into a target-date fund, which holds a mix of stocks and bonds and gets more conservative as you near retirement.
• The money grows tax-advantaged. You don’t pay tax on dividends or gains each year while it’s inside the account.
• It’s meant for retirement. Withdrawals before age 59½ are generally hit with a 10% penalty on top of regular income tax, with some exceptions.
• Your employer may add money in the form of a match.

Many companies now enroll new hires automatically at a default rate, often 3% to 6%. That default is a starting point picked by the plan, not a recommendation for you.

The employer match: the closest thing to free money

A match means your employer adds money to your 401(k) based on what you contribute. The most common formulas look like this:

• “50% up to 6%”: for every dollar you put in, they add 50 cents, on contributions up to 6% of your salary. Max match: 3% of salary.
• “100% up to 4%”: dollar for dollar, up to 4% of salary.
• “100% of the first 3%, plus 50% of the next 2%”: a common safe-harbor formula. Contribute 5%, get 4%.

The key is the cap. With “50% up to 6%,” contributing 3% gets you only half the match. You have to put in 6% to get all of it.

Mia’s match, in dollars

Mia’s employer matches 50% up to 6% of pay.

At 3%, she’s turning down $825 a year. That’s an instant 50% return on the extra $1,650 she’d contribute, before any investment growth. Nothing else in personal finance pays like that.

What does going from 3% to 6% actually cost her paycheck? The extra $1,650 a year is $137.50 a month before tax. Because traditional 401(k) contributions lower her taxable income, if she’s in the 12% federal bracket her take-home pay drops by roughly $121 a month, a bit less if her state has an income tax too.

Now the long view. Using the site’s 401(k) calculator, with these assumptions: 3% yearly raises, a 7% average yearly return (an assumption, not a promise), retiring at 67, and no taxes or fees counted:

Going from 3% to 6% doubles her balance at 67, from about $874,000 to about $1.75 million in future dollars. That’s roughly $121 a month of take-home pay today. Most of the final balance isn’t her money or her employer’s; it’s growth on top of both. That’s compound interest with 42 years to work.

Whether $1.75 million is “enough” depends on what she’ll spend and what Social Security pays. That’s its own calculation, covered in how much do I need to retire.

Traditional vs. Roth 401(k)

Many plans let you choose between two tax treatments, or split between them:

The rule of thumb: if you expect your tax rate to be higher now than in retirement, traditional tends to win. If you expect it to be lower now, Roth tends to win. Early-career workers in a low bracket, like Mia, often lean Roth. Peak earners often lean traditional. If you honestly don’t know, splitting your contributions is a reasonable hedge.

Employer matches have traditionally gone into the pre-tax side, even if you choose Roth. Some plans now offer a Roth match option, which is taxable to you in the year it’s made.

Vesting: when the match is really yours

Every dollar you contribute is 100% yours from day one. The employer match may not be. Vesting is the schedule for when the match becomes yours to keep if you leave.

• Immediate vesting: the match is yours right away.
• Cliff vesting: you own 0% until a set date, then 100%. For matching contributions, the cliff can be up to 3 years.
• Graded vesting: you own a growing share each year, reaching 100% within 6 years at most.

Say Mia’s plan has a 3-year cliff and she leaves after 2 years and 11 months. At 6%, she’d forfeit about $3,300 of match. If you’re thinking about changing jobs, check your vesting date first. Sometimes waiting a few weeks is worth thousands.

2026 contribution limits

The IRS sets yearly limits on how much you can contribute from your paycheck. For 2026:

A few notes:

• The limit is per person, across all your 401(k)s and 403(b)s combined, traditional and Roth together. Switching jobs mid-year doesn’t reset it.
• Your employer’s match doesn’t count against your $24,500.
• Higher earners may be required to make catch-up contributions as Roth contributions under newer rules. Check with your plan if you earn well into six figures and are 50 or older.
• Limits usually rise over time. They’re announced each fall for the following year.

Most people never come close to the limit, and that’s fine. The match comes first; the limit is a ceiling, not a goal.

Fees: the leak you don’t see

Every fund in your 401(k) charges an expense ratio, a yearly percentage of your balance. Some plans add administrative fees on top. They don’t show up as a bill; they just quietly lower your return.

Here’s what one percentage point does. Mia contributing 6%, everything else the same as above:

• 7% return after fees: about $1,747,005 at 67
• 6% return after fees (1% more in fees): about $1,372,246

A 1% fee difference costs her about $375,000 over her career. You can find your fund fees in the plan’s fee disclosure or on each fund’s fact sheet in your 401(k) website. If the plan offers low-cost index funds or a low-cost target-date fund, those are usually a sensible default.

Common 401(k) mistakes

1. Not getting the full match

This is the big one. If your formula is “50% up to 6%” and you contribute 4%, you’re declining part of your pay. If money is tight, contribute at least to the cap and cut somewhere else.

2. Cashing out when you change jobs

Tyler is 30 and leaves his job with $15,000 in his 401(k). The new job’s signing paperwork is boring; the cash-out form is easy. So he takes the cash.

Here’s what that costs him, using example numbers for someone in the 22% federal bracket:

• Federal income tax: $15,000 × 22% = $3,300
• Early withdrawal penalty: $15,000 × 10% = $1,500
• Gone before state tax: $4,800, leaving about $10,200

And that’s the small cost. Left invested at a 7% average return, that $15,000 could grow to about $160,149 by the time he’s 65. He traded $160,000 of future money for $10,200 today.

Your options when you leave a job are usually better: leave the money in the old plan if it allows, roll it into your new employer’s 401(k), or roll it into an IRA. Ask for a direct rollover, where the money goes straight from one account to the other. If a check is made out to you instead, the plan typically withholds 20% for taxes and you have 60 days to deposit the full amount to avoid taxes and penalties.

3. Treating a 401(k) loan as cheap money

Many plans let you borrow from your own 401(k), usually up to 50% of your vested balance or $50,000, whichever is less. It feels harmless because you pay yourself interest. The catches:

• The money you borrow is out of the market, missing whatever growth happens while it’s out.
• You repay it with after-tax dollars from your paycheck.
• If you leave or lose your job, the remaining balance generally has to be repaid by your tax-filing deadline for that year, or it’s treated as a withdrawal: taxed, and penalized if you’re under 59½.
• Many people cut their regular contributions while repaying, which can mean losing the match too.

A 401(k) loan can beat high-interest debt in a real emergency. It’s a bad way to fund a vacation or a down payment on a truck.

4. Setting it once and never raising it

Staying at your starting percentage for 20 years is one of the most common and least visible mistakes. Turn on automatic annual increases if your plan has them, or raise your rate by 1% every time you get a raise.

5. Not knowing what you’re invested in

Some older plans park money in a cash or stable-value option by default. If you’ve never looked, log in and check. Money that sits in cash for decades doesn’t get much of the growth that makes a 401(k) work.

Run your own numbers

Run your own numbers: put in your salary, your contribution, and your employer’s match formula.

If the calculator shows match you’re leaving on the table, that’s the first number to fix. To see whether your balance is on track for your age, compare it with the checkpoints in retirement savings by age.

What to do this week

1. Find your match formula. It’s in your benefits portal or the plan summary. Write it down in plain words: “they add X% when I put in Y%.”
2. Raise your contribution to at least the match cap. If that’s not possible today, raise it by 1% now and schedule another 1% in three months.
3. Check your vesting schedule and the date you become fully vested.
4. Look at your investments and their expense ratios. If you’re in cash by default, choose a fund.
5. Track down old 401(k)s from previous jobs and decide whether to leave them or roll them over directly.
6. Turn on automatic increases if your plan offers them.

Frequently asked questions

How much should I put in my 401(k)?

At minimum, enough to get the full employer match. A common rule of thumb is to save around 15% of your pay for retirement in total, counting the match. If you can’t start there, start at the match and increase 1% at a time.

What happens to my 401(k) when I leave my job?

Your own contributions and any vested match stay yours. You can usually leave the money in the old plan, roll it into your new employer’s plan, or roll it into an IRA. Cashing out is allowed but typically triggers income tax and, under 59½, a 10% penalty.

Is the employer match taxed?

A traditional (pre-tax) match isn’t taxed when it goes in. You pay income tax when you withdraw it in retirement. If your plan offers a Roth match and you choose it, the match counts as taxable income in the year it’s made.

Can I have a 401(k) and an IRA at the same time?

Yes. They have separate contribution limits. Depending on your income, a traditional IRA contribution may not be tax-deductible if you’re covered by a workplace plan, and Roth IRA eligibility phases out at higher incomes.

Should I choose a traditional or Roth 401(k)?

If your tax rate is likely lower now than it will be in retirement, Roth tends to come out ahead. If it’s likely higher now, traditional does. Many people split their contributions between the two when they’re unsure.

Keep reading

• How Much Do I Need to Retire?
• Am I Behind on Retirement? Savings Benchmarks by Age
• Compound Interest Explained Simply

Education, not financial advice. The numbers here are examples; talk to a licensed professional about your own situation. Some links may be sponsored or affiliate links; see our disclosure.