Question 1

What is a 401(k)?

Accepted Answer

A 401(k) is a tax-advantaged retirement savings plan sponsored by an employer in the United States. Employees can contribute a portion of their pre-tax salary, reducing their taxable income. Contributions grow tax-deferred until withdrawal in retirement, at which point they are taxed as ordinary income.

Question 2

What is employer matching?

Accepted Answer

Employer matching is when your company contributes additional money to your 401(k) based on your own contributions. For example, a '50% match up to 6% of salary' means if you contribute 6% of your salary, your employer adds another 3%. Always contribute at least enough to get the full employer match — it is essentially free money.

Question 3

What return rate should I use?

Accepted Answer

A common assumption is 7% average annual return, which reflects the long-term historical average of a diversified stock portfolio after inflation. More conservative estimates use 5–6%. The actual return depends on your specific fund selection and market conditions.

Question 4

What are the 401(k) contribution limits?

Accepted Answer

For 2025, the IRS limit for employee elective deferrals is $23,500 per year. If you are age 50 or older, you can make an additional catch-up contribution of $7,500, for a total of $31,000. These limits are adjusted periodically for inflation.

Question 5

Should I contribute to a traditional 401(k) or Roth 401(k)?

Accepted Answer

Traditional 401(k) contributions are pre-tax, reducing your current taxable income but taxed upon withdrawal. Roth 401(k) contributions are after-tax, meaning withdrawals in retirement are tax-free. If you expect to be in a higher tax bracket in retirement, a Roth may be beneficial. Consider consulting a financial advisor for personalized advice.

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