The 401(k), operated properly

The match is the highest guaranteed return you will ever be offered

If your employer matches 50 cents on the dollar, every dollar you defer becomes $1.50 the moment it lands. That is a 50% return before the market has done anything at all, and it is guaranteed — no allocation decision and no market cycle can take it away. Nothing else available to a normal investor comes close. Not deferring at least up to the full match is the single most expensive mistake you can make inside this account, and people make it every year without noticing.

Match formulas vary. Here is what three common ones pay on a $70,000 salary, assuming you defer enough to capture the whole thing:

Read your own plan document rather than assuming. The second and third formulas require you to defer twice as much as the first to collect the full amount, and a lot of people set their deferral to 3% because that number appeared somewhere in onboarding. Free money left uncollected compounds against you exactly as fast as money you did collect compounds for you — see compound interest for the arithmetic.

What you are allowed to put in

The employee deferral limit is what you can elect to contribute from your paycheck. Employer money sits outside it, under a separate combined employee-plus-employer cap that is far higher than the deferral limit — check the current IRS figure if you are anywhere near it.

2026 figures from IRS Notice 2025-67; 2025 column shown so you can see these move. Limits are adjusted most years — verify the current year's figure against the IRS before setting your deferral.

The enhanced catch-up for ages 60 to 63 is a SECURE 2.0 provision and replaces, rather than stacks on top of, the ordinary age-50 catch-up in those four years. If your savings rate is high enough that you are filling the deferral limit, you have already solved the hard part of this website.

Traditional or Roth: it is a tax-rate bet, nothing more

Traditional deferrals come out pre-tax and are taxed on withdrawal. Roth deferrals are taxed now and come out tax-free later. The decision rule is one comparison: your marginal tax rate today versus your expected marginal rate when you withdraw. That is the whole thing. "Tax diversification" is a real but minor consideration that gets used to avoid making the actual call.

Most people early in their careers are in a lower bracket than they will occupy later, which is a straightforward argument for Roth deferrals while young. The honest answer for a high earner in peak earning years is usually the opposite: take the deduction now at your top rate, and withdraw later in retirement when your taxable income is lower. If your employer offers both, you can split. The mechanics of the Roth side of the ledger, including the separate Roth IRA, are covered on their own page.

What to actually buy inside the plan

A 401(k) menu is usually twenty-odd funds, most of which exist because someone was paid to put them there. Find the broad index fund with the lowest expense ratio — typically an S&P 500 or total-market option — and use it. A target-date fund matching your approximate retirement year is a perfectly good default if you would rather not think about it; it handles the allocation and rebalancing for you, at a slightly higher fee.

What you are avoiding is the expensive actively managed fund sitting three rows above the cheap one on the same menu. Fees compound against you in exactly the way returns compound for you, and over a full career the difference between 0.05% and 1.00% is measured in six figures. The arithmetic is laid out on the index funds page. Steady payroll deferrals also mean you are already doing dollar-cost averaging without effort, which is the correct way to do it.

Vesting, and the four things you can do when you leave

Your own deferrals are yours from the moment they are withheld. Employer contributions may be subject to a vesting schedule — cliff vesting hands you the whole balance at a set anniversary, graded vesting releases it in slices over several years. Before resigning, check where you sit on that schedule; a few weeks can be worth thousands.

On leaving a job you have four options: leave the money in the old plan, roll it into the new employer's plan, roll it into an IRA, or cash it out. The first three are all defensible and depend on fee levels and fund quality. The fourth destroys wealth. Cash out $14,000 at 30 and you pay income tax plus, typically, a 10% early-withdrawal penalty, and you give up what that balance would have become: at 7% it would be roughly $80,000 by 55, before you add another cent. A quarter-century of compounding, traded for a partial cash payout today.

Assumes 7% average annual return, compounded monthly, no further contributions. Illustration only.

Run your own numbers in the compound interest calculator. If you are still building the base, how to save $100k sets out the funding order, and the investing hub covers where this account sits among the rest.

Educational content, not financial, tax, or legal advice. Figures are illustrations based on stated assumptions, not guarantees; markets involve risk, including loss of principal.