401(k) Basics and Employer Match: How Not to Leave Free Money Behind

If your job offers a 401(k), it may be one of your most valuable benefits. And if your employer offers a "match," skipping it can mean leaving money on the table. Here's how it works in plain words.

What is a 401(k)?

A 401(k) is a retirement savings plan through your job. The IRS explains that you choose to have part of your paycheck put into your own account in the plan. These are called elective deferrals (a fancy name for "money you choose to save from your pay").

There are two main types of contributions:

• Traditional (pre-tax): The IRS says this money generally isn't subject to federal income tax when it goes in. You pay tax later when you take it out.
• Roth: If your plan allows it, you can make Roth contributions. The IRS says these are included in your taxable income the year you make them. The IRS says Roth contributions generally follow the tax rules for Roth IRAs. Ask your plan how its Roth option works.

Either way, the IRS notes your investment gains aren't taxed while they stay in the plan.

What is an employer match?

If your plan allows it, your employer can add money to your account when you contribute. The IRS gives this example: a plan might give 50 cents for each dollar you choose to save.

Made-up example: Dana earns $50,000 a year. Her employer matches 50 cents per dollar on the first 6% of pay she saves.

• If Dana saves 6% ($3,000), her employer adds $1,500.
• If Dana saves 2% ($1,000), her employer adds only $500.
• If Dana saves nothing, she gets no match.

By saving less than 6%, Dana leaves part of the match behind. (Every plan's formula is different. Check yours.)

The Department of Labor puts it simply: find out how much you need to contribute to get the full employer contribution, and how long you need to stay to keep that money.

"How long you need to stay": vesting

Vesting means ownership. The IRS explains:

• Your own contributions are always 100% yours.
• Your employer's contributions may follow a vesting schedule. If you leave before you're fully vested, you may lose some of the employer money.

The IRS shows two sample schedules a plan might use:

Some plans vest you right away. The IRS says safe harbor 401(k) plans must make employer contributions that are fully vested when made. Check your plan's Summary Plan Description or ask HR.

How much can I put in?

The IRS sets yearly limits. For 2026:

• $24,500 in employee contributions
• $8,000 extra "catch-up" if you're 50 or older (if your plan allows)
• $11,250 catch-up instead, for people aged 60, 61, 62, or 63 (a SECURE 2.0 rule)
• $72,000 overall limit on money going into your account from you and your employer (not counting catch-ups), or 100% of your pay if less

2027 limits: As of November 1, 2026, the IRS had not yet announced the 2027 401(k) limits. The IRS says it issues these each fall. Check IRS.gov before setting your 2027 amount.

You don't have to save the maximum. Many people start small and raise their rate over time.

Common ways people leave money behind

1. Not signing up. The Department of Labor says that in 2024, roughly 30% of private industry workers who had access to a plan like a 401(k) didn't participate.
2. Saving less than the match. As in Dana's example.
3. Leaving before vesting. If you're thinking about changing jobs, check your vesting date first.
4. Cashing out early. The IRS says withdrawals before age 59½ are generally hit with a 10% additional tax on the taxable part, on top of regular income tax. There are exceptions, like separating from your job after age 55, total and permanent disability, and certain emergencies. The DOL suggests keeping savings in your plan or rolling it to an IRA or new employer's plan when you change jobs.

What about auto-enrollment?

Some plans sign you up automatically at a set percentage unless you choose otherwise, according to the IRS. Check what rate you were enrolled at. It may be less than what you need for the full match.

Simple steps this open enrollment

• Log in to your 401(k) account. Check your contribution rate.
• Find your plan's match formula and vesting schedule.
• Raise your rate to at least get the full match, if you can afford to.
• Update your beneficiary.
• Look at your investment choices. The DOL suggests spreading savings across different types of investments to help reduce risk.