401(k) Guide

Maximise your employer retirement benefit — contribution limits, investment choices, and withdrawal rules.

A 401(k) is an employer-sponsored retirement savings account that allows employees to contribute pre-tax or after-tax (Roth) dollars, with many employers matching a portion. It is the cornerstone of American retirement planning — the combination of tax advantages and employer matching makes it the highest-return "investment" available to most employees.

2025 Contribution Limits

IRS contribution limits increase periodically with inflation. Contributing the maximum is one of the most impactful financial decisions you can make.

Employee contribution limit: $23,500 (2025) — $31,000 if age 50+ (catch-up provision)
Total limit (employee + employer): $70,000 (2025)
At minimum: Contribute enough to get the full employer match — that is a 50-100% guaranteed return
Even $200/month invested from age 25 at 8% average return = $700,000+ by age 65

Traditional vs Roth 401(k)

Most employers now offer both options. The key question: do you expect to be in a higher or lower tax bracket in retirement?

Feature	Traditional 401(k)	Roth 401(k)
Tax treatment	Pre-tax contributions (reduces income now)	After-tax (no reduction now)
Growth	Tax-deferred	Tax-free
Withdrawals	Taxed as ordinary income	Tax-free (qualified)
RMDs	Required at 73	No RMDs (after 2024 SECURE 2.0)
Best if...	High tax bracket now, lower in retirement	Lower tax bracket now, higher in retirement

Investment Choices Inside a 401(k)

Most 401(k) plans offer a limited menu of mutual funds. Choosing wisely within this limited selection is critical.

Target-date funds: Auto-allocate based on retirement year — set and forget, but check the expense ratio
S&P 500 index fund: If available, usually the best option — lowest cost, market returns
Company stock: Limit to <5% of portfolio — concentration risk from employer failure (Enron lesson)
Total market funds, bond index funds: Build a simple 2-3 fund portfolio inside the plan
Avoid: High-expense-ratio actively managed funds — cost drag compounds against you for decades

Withdrawals and Rules

Understanding the rules prevents costly mistakes.

Age 59½: Penalty-free withdrawals begin (taxes still apply for traditional)
Age 73: Required Minimum Distributions (RMDs) must begin
Early withdrawal: 10% penalty + income tax — avoid at almost any cost
Hardship withdrawals: Available for specific circumstances but always a last resort
Rollover: If you leave your employer, roll over to an IRA or new employer plan — do not cash out

💡 Pro Tip: Increase your 401(k) contribution by 1% each year when you receive a pay raise. Most people never notice the extra savings, but the compounding effect over decades is enormous.

Key Takeaways

✓Always contribute at least enough to get the full employer match — it is free money
✓2025 limit is $23,500 — maxing this out is one of the most powerful wealth-building decisions
✓Choose low-cost index funds over actively managed funds inside your 401(k)
✓Never cash out when switching jobs — roll over to preserve tax advantages and avoid penalties
✓Roth 401(k) is better if you expect higher taxes in retirement; traditional if you expect lower