A 401(k) is an employer-sponsored retirement savings and investment plan. The plan is typically optional and has eligibility requirements, such as participant age and employment timeframe. In a traditional 401(k), money is deducted from an employee's pre-tax pay each pay period and deposited into the designated investment account.

What Is a 401(k)?

A 401(k) is a retirement savings plan offered by employers in the United States. It allows employees to contribute a portion of their paycheck into a tax-advantaged investment account. Contributions are often made pre-tax in a traditional 401(k), reducing taxable income in the year they’re made. Participation is typically optional and may have eligibility requirements based on age or length of employment.

Over time, the goal is for your 401(k) balance to grow through contributions and investment returns, helping to provide income during your retirement years.

How Much Will a 401(k) Pay in Retirement?

There’s no fixed payout for a 401(k) at retirement. Your total retirement income from a 401(k) depends on several factors, including:

• How much you’ve contributed
• How early you started saving
• Employer matching contributions
• Your annual income and savings rate
• Investment performance over time
• The number of years you plan to withdraw from it

To estimate your potential retirement income, you can consult a financial advisor or use a 401(k) calculator tailored to your financial profile.

How Much Should You Contribute to a 401(k)?

Contribution amounts vary based on personal goals, income level, age, and lifestyle expectations in retirement. Financial experts often recommend saving at least 15% of your annual income, including employer contributions, throughout your career to build a solid retirement fund.

What Do the Average Retirement Savings Look Like?

As of 2022, the average household retirement savings was around $87,000, though this varies significantly by age group:

• Under 35: $18,880
• Ages 35–44: $45,000
• Ages 45–54: $115,000
• Ages 55–64: $185,000
• Ages 65–74: $200,000
• Ages 75+: $130,000 (as funds are being drawn down)

These averages provide a general benchmark but individual needs may vary.

Why Is It Called a 401(k)?

The name “401(k)” comes from Section 401(k) of the Internal Revenue Code (IRC), which outlines the rules for employer-sponsored retirement plans like pensions, profit-sharing, and stock bonus plans.

How Does a 401(k) Work?

A 401(k) is a defined contribution retirement plan where both the employee and employer can contribute, up to annual limits set by the IRS. Contributions are automatically deducted from each paycheck and placed into an investment account managed by a financial institution, not the employer.

Types of 401(k) plans include:

• Traditional 401(k): Contributions are made pre-tax, and withdrawals are taxed as income.
• Roth 401(k): Contributions are made after-tax, but withdrawals in retirement are tax-free.

You can typically begin withdrawing funds without penalty at age 59½. Early withdrawals often incur penalties and taxes unless exceptions apply. In retirement, you can take required minimum distributions (RMDs), convert the balance into an IRA or annuity, or take a lump sum.

How Employer Matching Works

Many employers offer a 401(k) match, where they contribute a percentage of what you contribute, often up to a limit. For example, if your company matches up to 4.5%, and you contribute that much, they’ll match it dollar for dollar.

Example scenario:

• You contribute 3% → Employer matches 3%
• You contribute 5% → Employer still matches 4.5% (maximum match)

According to Vanguard, 95% of employers offering a 401(k) included a match program in 2022, making it a valuable benefit for employees to maximize.