401(k) Fundamentals

2026 contribution limits

• Employee contribution limit: $24,500
• Catch-up for ages 50+: additional $7,500 (total $32,000)
• Super catch-up for ages 60–63: additional $11,250 (total $35,750)
• Combined employee + employer limit: $72,000 (or $80,500 / $84,250 with catch-ups)

Starting in 2026, catch-up contributions for participants whose prior-year Social Security wages exceeded $150,000 must be made as Roth (after-tax) rather than pre-tax. This rule, delayed from earlier years, was created under SECURE 2.0.

The employer match

Most employers match some fraction of your contribution. A common formula: 100% match on the first 3% of salary, 50% match on the next 2%. On a $100,000 salary, that's $4,000 of employer money — but only if you contribute at least 5% yourself.

The employer match is the single highest-return investment you will ever see:

• Immediate 50–100% return on your contribution.
• Plus tax deduction on your contribution (Traditional) or tax-free growth (Roth).
• Plus decades of compounding.

Skipping the match to pay down credit cards is the one defensible reason not to maximize it. Every other use of that money is almost certainly inferior.

Vesting

Some employers' matches vest over time — you earn full ownership only after several years of employment. A typical vesting schedule:

• Cliff vesting: 0% vested until year 3, then 100%.
• Graded vesting: 20% per year for 5 years.

Leaving before full vesting forfeits the unvested portion. Factor this into any job-change decision.

Traditional vs Roth

Most 401(k) plans let you choose Traditional (pre-tax) or Roth (after-tax) for each contribution:

Traditional 401(k) — Contributions reduce your taxable income today. Growth is tax-deferred. Withdrawals in retirement are taxed as ordinary income.

Roth 401(k) — Contributions are after-tax (no deduction). Growth is tax-free. Qualified withdrawals in retirement are tax-free.

The choice hinges on whether your tax rate is higher now or in retirement:

• Higher now than in retirement? Traditional wins.
• Lower now than in retirement? Roth wins.
• Unsure? Split the difference — many investors contribute to both.

Detailed analysis in "Traditional vs Roth IRA" — the math is the same for 401(k)s.

Investment options

Most 401(k)s have a menu of 10–25 funds. Good menus include:

• A low-cost total U.S. stock index fund (expense ratio under 0.10%)
• A low-cost international stock fund
• A low-cost bond fund
• A target-date series

Bad menus have only high-cost active funds with expense ratios above 0.75%. If your menu is bad, still contribute enough to capture the match, then route additional savings to IRAs and HSAs where you have better fund choices.

Rollovers

When you leave an employer, you have four options for your old 401(k):

1. Leave it — Often fine if the plan is good.
2. Roll it into a new employer's 401(k) — Consolidates accounts.
3. Roll it into a Traditional IRA — Gives you access to any investment, but may complicate future backdoor Roth contributions.
4. Cash it out — Almost always a terrible idea. You pay ordinary income tax plus a 10% early-withdrawal penalty if you're under 59½.

Early withdrawal penalty

Withdrawals from a 401(k) before age 59½ incur a 10% penalty on top of ordinary income tax, with some exceptions:

• Separation from service in the year you turn 55 or later ("Rule of 55")
• Substantially Equal Periodic Payments (SEPP / 72(t))
• Qualified birth or adoption expenses
• Hardship distributions (narrow categories)

These exceptions are narrow. Plan to leave the money alone until retirement unless absolutely necessary.

How Horizons uses this

In Horizons, 401(k) assets are tagged with tax treatment (pre-tax or Roth) and contribution category. The engine applies 2026 limits correctly when modeling employer matches and your contributions, including catch-ups if you're age-eligible. Withdrawals in retirement apply the correct tax treatment based on the account's classification.