401(k) Complete Guide: Everything You Need to Know in 2024
Key Takeaways
- 2024 contribution limit: $23,000 (plus $7,500 catch-up if 50+)
- Always contribute enough to get your full employer match - it's free money
- Roth 401(k) is often better for younger workers and those in lower tax brackets
- Target-date funds offer simple, hands-off diversification for most investors
Table of Contents
- 1. What is a 401(k)?
- 2. How Does a 401(k) Work?
- 3. Contribution Limits for 2024
- 4. Understanding Employer Matching
- 5. Roth vs Traditional 401(k)
- 6. Investment Options and Strategies
- 7. Withdrawal Rules and Penalties
- 8. What Happens When You Change Jobs
- 9. Strategies to Maximize Your 401(k)
- 10. Common 401(k) Mistakes to Avoid
What is a 401(k)?
A 401(k) is an employer-sponsored retirement savings plan that allows employees to save and invest a portion of their paycheck before taxes are taken out. Named after section 401(k) of the Internal Revenue Code, these plans have become the primary retirement savings vehicle for millions of Americans.
The beauty of a 401(k) lies in its triple tax advantage: contributions reduce your current taxable income, investments grow tax-deferred, and many employers offer matching contributions that provide an instant return on your investment.
Key 401(k) Benefits
- Tax Advantages: Reduce current taxes and defer taxes on growth
- Employer Match: Free money that boosts your savings
- Asset Protection: Generally protected from creditors
- Automatic Savings: Payroll deduction makes saving effortless
How Does a 401(k) Work?
When you enroll in your employer's 401(k) plan, you choose a percentage of your salary to contribute. This money is automatically deducted from your paycheck before taxes (for traditional 401(k)) or after taxes (for Roth 401(k)), and invested according to your selections.
The 401(k) Process
- 1Enrollment: Sign up through your employer's plan administrator
- 2Contribution Selection: Choose percentage or dollar amount to contribute
- 3Investment Choice: Select from available investment options
- 4Automatic Deduction: Contributions taken from each paycheck
- 5Tax-Deferred Growth: Investments grow without annual taxes
401(k) Contribution Limits for 2024
The IRS sets annual limits on how much you can contribute to your 401(k). These limits are adjusted annually for inflation and include both employee contributions and special catch-up provisions for older workers.
| Contribution Type | 2024 Limit | 2023 Limit |
|---|---|---|
| Employee Contribution (under 50) | $23,000 | $22,500 |
| Catch-up Contribution (50+) | $7,500 | $7,500 |
| Total Employee Limit (50+) | $30,500 | $30,000 |
| Total Contribution Limit (employee + employer) | $69,000 | $66,000 |
| Total with Catch-up (50+) | $76,500 | $73,500 |
Important Note: Starting in 2025, catch-up contributions for employees aged 60-63 will increase to $10,000 instead of $7,500 under the SECURE Act 2.0.
Understanding Employer Matching
Employer matching is essentially free money added to your 401(k) based on your contributions. Not taking full advantage of your employer match is like leaving part of your salary on the table.
Common Matching Formulas
50% match up to 6% of salary
Employer contributes $0.50 for every $1 you contribute, up to 6% of your salary
Example: $60,000 salary → Maximum match = $1,800/year
100% match up to 3% of salary
Employer matches dollar-for-dollar up to 3% of your salary
Example: $60,000 salary → Maximum match = $1,800/year
Tiered matching
100% on first 3%, then 50% on next 2%
Example: $60,000 salary → Maximum match = $2,400/year
Vesting Schedules
Vesting determines when employer contributions become fully yours. Your own contributions are always 100% vested immediately.
- Immediate vesting: All employer contributions are yours right away
- Graded vesting: Gradually vest over 2-6 years (e.g., 20% per year)
- Cliff vesting: 0% vested until a specific date, then 100% (max 3 years)
Roth vs Traditional 401(k): Which is Better?
The choice between Roth and traditional 401(k) contributions depends on your current tax situation and expectations for retirement. Many plans now offer both options, and you can split contributions between them.
Traditional 401(k)
- Pre-tax contributions reduce current taxable income
- Tax-deferred growth
- Taxed as ordinary income in retirement
- Required minimum distributions at 73
Best for:
High earners expecting lower taxes in retirement
Roth 401(k)
- After-tax contributions (no current tax break)
- Tax-free growth
- Tax-free withdrawals in retirement
- No RMDs if rolled to Roth IRA
Best for:
Young workers and those expecting higher taxes in retirement
Investment Options and Strategies
Most 401(k) plans offer a variety of investment options. Understanding these choices and selecting the right mix is crucial for long-term growth.
Common 401(k) Investment Options
Target-Date Funds
Automatically adjusts asset allocation as you approach retirement
✓ Best for: Hands-off investors
Index Funds
Low-cost funds that track market indices like S&P 500
✓ Best for: Cost-conscious investors
Actively Managed Funds
Professional managers select investments to beat the market
⚠ Higher fees, mixed performance
Bond Funds
Fixed-income investments for stability and income
✓ Best for: Risk-averse investors near retirement
Company Stock
Shares in your employer's company
⚠ Limit to 10% to avoid concentration risk
Common 401(k) Mistakes to Avoid
1. Not Contributing Enough for Full Match
Failing to get your full employer match is leaving free money on the table
2. Cashing Out When Changing Jobs
You'll pay taxes plus a 10% penalty, and lose years of compound growth
3. Ignoring Investment Fees
High fees can cost hundreds of thousands over your career
4. Being Too Conservative When Young
Young investors can afford more risk for higher long-term returns
5. Not Increasing Contributions Over Time
Failing to increase contributions with raises limits your retirement savings
Frequently Asked Questions
What is the 401(k) contribution limit for 2024?
The 401(k) contribution limit for 2024 is $23,000 for employees under 50. Those 50 and older can contribute an additional $7,500 in catch-up contributions, for a total of $30,500.
How does 401(k) employer matching work?
Employer matching is free money your company adds to your 401(k) based on your contributions. Common formulas include 50% match up to 6% of salary or 100% match up to 3-4% of salary. Always contribute enough to get the full match.
Should I choose Roth or traditional 401(k)?
Choose Roth 401(k) if you expect to be in a higher tax bracket in retirement or are young with many years until retirement. Choose traditional 401(k) if you are in a high tax bracket now and expect lower taxes in retirement.
When can I withdraw from my 401(k) without penalty?
You can withdraw from your 401(k) without the 10% early withdrawal penalty starting at age 59½. Some exceptions allow earlier withdrawals, including the Rule of 55, hardship withdrawals, and substantially equal periodic payments (SEPP).
What happens to my 401(k) when I change jobs?
When changing jobs, you can: 1) Leave it with your former employer, 2) Roll it over to your new employer's 401(k), 3) Roll it to an IRA, or 4) Cash it out (not recommended due to taxes and penalties).
Ready to Optimize Your 401(k)?
Use our free 401(k) calculator to see how much you could have at retirement and optimize your contribution strategy.
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