By Christian BrinkleyLicensed NC Insurance Agent, NPN 22217190, NC Life & Health · Updated October 14, 2026 · 4 min read
What Is a 401(k)?
A 401(k) is a retirement account you get through work. It lets you set aside part of your paycheck before you spend it. The money goes into investments you choose from your plan's menu. You do not pay tax on the growth while it stays in the account.
How It Works in Real Life
Say you earn 50,000 dollars a year and save 6 percent. That is 3,000 dollars a year, or about 115 dollars per biweekly paycheck. Your employer sends it to your 401(k). You pick investments inside the account, usually stock and bond funds.
Your account grows two ways. You keep adding money. Your investments may earn returns, and those returns earn returns of their own. That is compound growth. It starts slow and gets more powerful the longer you leave the money alone.
The Employer Match: Do Not Leave It on the Table
Many employers add money when you contribute. A common formula is 50 cents for every dollar you save, up to 6 percent of your pay. Some match dollar for dollar up to a limit. Check your plan documents or ask HR for the exact formula.
The match is part of your pay. If you skip it, you are turning down money you already earned. If your employer matches up to 6 percent, contribute at least 6 percent. That is step one for almost everyone.
Traditional vs Roth 401(k)
Many plans offer two types. The difference is when you pay tax.
With a traditional 401(k), you contribute pre-tax dollars. That lowers your taxable income this year. You pay income tax later, when you withdraw in retirement.
With a Roth 401(k), you contribute after-tax dollars. You pay tax now and get no break this year. In retirement, qualified withdrawals are tax free, including the growth.
2026 Contribution Limits
The IRS sets yearly limits. For 2026, employees can contribute up to 24,500 dollars to a 401(k). The employer match does not count toward that limit. The limit covers all your 401(k) plans combined if you have two jobs.
What Do You Invest In?
A 401(k) is an account, not an investment. Most plans offer a menu of mutual funds, usually stock funds, bond funds, and target date funds.
A target date fund is the simplest choice. Pick the fund with the year closest to your planned retirement. It starts with more stocks when you are young and shifts toward bonds as you age.
When You Leave Your Job
When you leave a job, you can leave the money in the old plan, roll it into the new employer's plan, or roll it into an IRA. Cashing out is usually the worst choice: you pay income tax plus generally a 10 percent penalty if under 59 and a half, and you lose years of growth. A direct rollover moves the money straight between accounts with no tax due on the move.
Mistakes to Avoid
Not getting the full match is the biggest one. Fix that first.
Setting your rate once and never reviewing it is next. Check it yearly.
Taking loans or early withdrawals for nonemergencies costs you growth. If you leave your job with a loan outstanding, you may have to repay it fast or face taxes and penalties.
How to Get Started
If you have not enrolled, do it today. Log in to your plan site or talk to HR. Set your rate to at least the full match. Pick a target date fund or a simple mix of low cost funds. Set a reminder to raise your rate by one percent each year or with each raise.
Already enrolled? Check three things. Are you getting the full match? Is your rate still right? Does your investment mix still make sense?
Questions people ask me about this
What is a 401(k)?
A 401(k) is a retirement account you get through work. It lets you set aside part of your paycheck before you spend it. The money goes into investments you choose from your plan's menu. You do not pay tax on the growth while it stays in the account. Saving is automatic. You pick a percentage of your pay.
What is the employer match: do not leave it on the table?
Many employers add money when you contribute. A common formula is 50 cents for every dollar you save, up to 6 percent of your pay. Some match dollar for dollar up to a limit. Check your plan documents or ask HR for the exact formula. The match is part of your pay. If you skip it, you are turning down money you already earned.
What do you invest in?
A 401(k) is an account, not an investment. Most plans offer a menu of mutual funds, usually stock funds, bond funds, and target date funds. A target date fund is the simplest choice. Pick the fund with the year closest to your planned retirement. It starts with more stocks when you are young and shifts toward bonds as you age.
Get the next guide by email
New guides go out when they are published. No spam, no selling your address, unsubscribe any time.