Your 401(k) is more than just a savings account — it’s one of the most powerful tools for building long-term wealth and preparing for retirement with confidence.
As with any financial vehicle, though, there are different types of accounts, lots of rules and regulations, and a variety of decisions to be made. That leads to some confusion, even with what we call them. Think about Kleenexes, Frisbees or Popsicles. These are terms for a specific product that have become the generic slang for all similar items. When someone refers to their retirement accounts, they might call them "401(k)s" that same way, regardless of what kind of account they actually are.
In this guide, our fiduciary advisors answer the most common 401(k) questions to help you take control of your future. Let’s dig in.
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary to an investment account.
"When most people start working at an employer, they either get immediate access to the 401(k), or they become eligible after some duration of employment," says Chamberlin lead holistic planner Josh Reesman. "Once you're eligible to contribute to a 401(k) plan, you can elect to have a percentage of your income from every single paycheck withheld into it automatically."
The money contributed, and any earnings, grow tax-deferred or tax-free (see the next question about Roth accounts for more on this) until retirement. The plan is named after the section of the Internal Revenue Code that governs it.
Traditional vs. roth 401(k)s and iras |
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Roth: Taxed Now |
Traditional: Taxed Later |
| With a Roth 401(k), contributions are made with after-tax dollars, so there's no immediate tax deduction. However, qualified withdrawals in retirement are entirely tax-free. | With a traditional 401(k), your contributions are made with pre-tax dollars, meaning they reduce your taxable income in the year you contribute. Your investments grow tax-deferred, and you pay taxes on withdrawals in retirement. |
The IRS sets an annual limit on the total amount an employee can contribute to their 401(k) plan from their salary. This limit applies to the sum of your contributions, regardless of whether they are directed to a traditional 401(k), a Roth 401(k), or a combination of both. You cannot contribute the maximum to each.
So what is the maximum 401(k) contribution in 2025? This year, employees can contribute up to $23,500 to their 401(k) account.
If you are age 50 or older, you can make an additional "catch-up" contribution of $7,500, bringing your total to $31,000.
(Your employer might contribute on your behalf as well; see the “Terminology and Definitions” section below for more information.)
Limits may change yearly — check with your fiduciary advisor.
Your employer typically offers a selection of investment options, most commonly mutual funds.
"Inside the 401(k), there are going to be a number of different investment options," Josh explains. "If you're confused by all of those, the most basic is usually tsome very simple options that are called target-date or lifecycle plans. They're effectively trying
to marry up your investment strategy with your expected time horizon on retirement.
"So if you're forecasting that, 'hey, I'm going to retire in 2050,' you can use some of those target-date or lifecycle funds to say, 'I want to buy a 2050 fund.' That product will have a certain mixture of stocks and bonds, with stocks being more risky and bonds being a little bit safer. So in the early years, when you're furthest away from retirement, you'll have more stocks in the portfolio. As you get closer to that target retirement date, they're going to change the mixture around, and you'll have more bonds for safety. When it comes to choosing the right investments in your 401(k), if you do have a financial advisor, I would recommend you consult with them."
In addition to these target-date funds, your plan could also offer target-risk funds, and/or various individual mutual funds (e.g., stock funds, bond funds). You choose how to allocate your contributions among these options.
When you leave an employer, you generally have four main options for your 401(k):
401(k) withdrawal rules are designed to ensure the money is saved and used for retirement if at all possible. Before you reach age 59½, there is generally a 10% early withdrawal penalty if you take money out of your accounts. Since the money is withheld from your paycheck pre-tax, withdrawals before this age are also typically subject to income tax in addition to the penalty, with some exceptions (e.g., certain medical expenses, qualified higher education expenses, or if you leave your employer in or after the year you turn 55).
While 401(k), 403(b), and 457(b) accounts all serve as employer-sponsored retirement savings plans with tax advantages, their primary distinctions lie in who can offer them and some specific rules regarding withdrawals and contributions.
There are traditional and Roth versions of each, and the rules and regulations for these types of accounts are all very similar. Your employer’s benefits administrator or the plan service provider can provide you with more detailed information.
An employer match is when your employer contributes a certain amount to your 401(k) based on your contributions. For example, an employer might match 50% of your contributions up to 6% of your salary. You should always aim to contribute at least enough to receive the full employer match, as it's essentially "free money" for your retirement.
Vesting refers to your ownership of the money in your 401(k) account, particularly employer contributions. Your own contributions are always 100% vested. Employer contributions may be subject to a vesting schedule (e.g., gradual vesting over several years or "cliff" vesting where you become 100% vested after a specific period). If you leave your job before you are fully vested, you may forfeit a portion of your employer's contributions.
"Inside your 401(k), there's usually many different options, and oftentimes you can build a pretty robust plan of how you want to invest those dollars," Josh says. "And all of that money that you put into the 401(k) can reduce your taxable income."
So, like many of your retirement decisions, how you structure and utilize your 401(k) can have implications for taxes, social security and legacy planning. Chamberlin’s holistic approach to the retirement roadmap means we examine all of these parts as a cohesive whole, helping you build a plan that gives you confidence and security.
Chamberlin is here to help you navigate the options and create a plan tailored to your needs, goals and dreams. Visit our online Learning Center for more resources on holistic retirement planning, and Schedule a Call Today and take the first step toward a confident financial future.