Part 1: Your 401(k): What It Is and How to Make the Most of Your Employer’s Contribution
This is Part 1 of a two-part series. Part 2 covers the pre-tax vs. Roth decision and where to invest your money.
Early in my career, I made the most common 401(k) mistakes. I signed up during onboarding, clicked a few buttons, and didn’t think about it again for years. I didn’t understand that my money wasn’t actually invested — it was sitting in a money market fund earning almost nothing. And when I left that job, I was shocked to see my balance drop. I had no idea what vesting was or that I was forfeiting thousands of dollars in employer contributions by leaving before I was fully vested.
I don’t want you to make those same mistakes.
If you do only one thing after reading this: make sure you’re contributing enough to get your full employer match.That’s free money. Everything else builds on that foundation.
Your 401(k) is likely going to be your largest retirement asset. It’s also one of the few places where your employer might literally give you free money. But most people don’t understand how it works, what they’re entitled to, or what they’re leaving on the table.
What is a 401(k), actually? A 401(k) is a retirement savings account sponsored by your employer. The name comes from the section of the tax code that created it — not exactly inspiring, but here we are.
Here’s what makes it special: Tax advantages — depending on how you set it up, you either don’t pay taxes on the money going in (traditional/pre-tax) or you don’t pay taxes on the money coming out (Roth). We’ll cover this in Part 2. Higher contribution limits than IRAs. Employer contributions — many employers add money on top of what you contribute. Automatic payroll deductions — the money comes out before you see it, which makes saving easier.
Key numbers for 2026: You can contribute up to $24,500 of your own money. If you’re 50 or older, you can add another $8,000 in catch-up contributions. If you’re 60-63, there’s a higher catch-up of $11,250 (this is new under SECURE 2.0, and it applies only during those specific ages — at 64 you revert to the regular catch-up). One more wrinkle: starting in 2026, if you earned more than $150,000 in 2025, your catch-up contributions must be made as Roth, not pre-tax.
The free money: understanding employer contributions. This is where a lot of people leave money on the table. Many employers don’t just let you save in a 401(k) — they add their own money to your account.
The match is the most common structure. Your employer contributes money based on how much you contribute. A dollar-for-dollar match up to 6% means if you make $60,000 and contribute 6% ($3,600), your employer also puts in $3,600. That’s $7,200 going into your retirement, but only $3,600 came from your paycheck. If you only contribute 3%, you only get a 3% match — you’re leaving $1,800 on the table.
A partial match works differently. Your employer might match 50 cents on the dollar up to 6%. Same $60,000 salary, same 6% contribution ($3,600), but your employer puts in $1,800 (half). Still free money, but you need to understand the math.
The key question: How much do you need to contribute to get the FULL employer match? That’s your minimum target.
Non-elective contributions are different — some employers contribute a percentage of your salary regardless of whether you contribute anything. If your employer contributes 5% no matter what and you make $60,000, you get $3,000 even if you put in $0. This is generous, but don’t let it stop you from contributing yourself.
The match math: why this matters more than you think. Let’s say you’re 45, making $80,000, and your employer offers a dollar-for-dollar match up to 3%.
Contribute 1%, employer matches 1%: $800 from you, $800 from them, $1,600/year total. Contribute 3%, employer matches 3%: $2,400 from you, $2,400 from them, $4,800/year total.
Over 25 years at 7% average returns: the 1% scenario ends at roughly $101,000. The 3% scenario ends at roughly $304,000.
By contributing an extra $1,600 per year, you end up with over $200,000 more. Half of that came from your employer — money that was available to you the whole time.
Vesting: when is it actually yours? Here’s something that surprises a lot of people — and surprised me when I was young: the money your employer contributes may not be fully yours right away.
Your contributions are always 100% yours immediately.
Employer contributions are often subject to a vesting schedule. Vesting means ownership — how much of the employer’s contributions you keep based on how long you’ve worked there.
Immediate vesting: Everything is yours right away. Generous, but less common.
Cliff vesting: You own 0% until you hit a milestone (often 3 years), then 100%. Leave at 2 years and 11 months? You might get nothing.
Graded vesting: You gain ownership gradually — maybe 20% after year 2, 40% after year 3, up to 100% after year 6.
Why this matters. Before you take a job, the vesting schedule is part of your total compensation. Before you leave a job, know what you’re walking away from — if you’re 80% vested with $50,000 in employer contributions and you leave, you forfeit $10,000. When negotiating a new job, leaving unvested money behind is a real cost you can factor in.
I’ve seen too many people assume all the money in their 401(k) was theirs, then be surprised when they leave and the balance drops. That was me, early in my career. Don’t be that person. Find out your vesting schedule now.
A note on other plan types. 401(k)s get all the attention, but depending on where you work, you might have a 403(b) (nonprofits, schools, hospitals — essentially the same), a 457(b) (government employees — same limits, no early withdrawal penalty), or a SIMPLE IRA (small businesses — $17,000 limit in 2026, with $4,000 catch-up for 50+ or $5,250 for ages 60-63). If you have self-employment income, the SEP-IRA is worth knowing about — I covered it in a previous post. The principles here apply to all of these.
What you need to find out. What type of plan do you have? Does your employer contribute — and is it a match or automatic? If it’s a match, what’s the formula? What’s the vesting schedule? What’s your current contribution rate — are you getting the full match? What is your money invested in?
The place to find most of this is your Summary Plan Description (SPD), which HR can provide or you can find on your 401(k) provider’s website.
The bottom line. Your 401(k) isn’t exciting. But it’s probably the most important retirement tool you have.
At minimum: know what you have. Contribute enough to get the full employer match — this is non-negotiable. Understand what you’re invested in.
The match is free money. The tax advantages are real. The long-term impact is enormous.
Don’t leave it on autopilot without understanding what you’ve got.
Part 2 covers the pre-tax vs. Roth decision, where to invest your money, and why having the right mix matters more than most people realize.