Question 1

What are the 2025 401(k) contribution limits?

Accepted Answer

For 2025, the IRS allows employees under age 50 to contribute up to $23,500 per year to their 401(k). If you are 50 or older, you can make an additional catch-up contribution of $7,500, bringing your total limit to $31,000. These limits apply only to your employee deferrals and do not include employer matching contributions.

Question 2

How does employer matching work?

Accepted Answer

Employer matching means your company contributes additional money to your 401(k) based on your own contributions. A common match is 50% of contributions up to 6% of salary. For example, if you earn $75,000 and contribute 6% ($4,500), your employer adds 50% of that ($2,250). This is essentially free money, so always contribute at least enough to get the full match.

Question 3

What is the difference between a traditional 401(k) and a Roth 401(k)?

Accepted Answer

A traditional 401(k) uses pre-tax dollars, reducing your taxable income now, but withdrawals in retirement are taxed as ordinary income. A Roth 401(k) uses after-tax dollars, so you pay taxes now, but all qualified withdrawals in retirement are completely tax-free. If you expect to be in a higher tax bracket in retirement, a Roth 401(k) may be better. If you need the tax break now, traditional is often preferred.

Question 4

What is vesting and how does it affect my 401(k)?

Accepted Answer

Vesting determines how much of your employer match you get to keep if you leave the company. Your own contributions are always 100% vested. Employer contributions may vest gradually over 3 to 6 years (graded vesting) or all at once after a set period (cliff vesting). Check your plan documents to understand your vesting schedule before changing jobs.

Question 5

What happens if I withdraw from my 401(k) early?

Accepted Answer

If you withdraw from a traditional 401(k) before age 59 and a half, you will owe regular income tax on the amount plus a 10% early withdrawal penalty. On a $50,000 withdrawal in the 22% tax bracket, that means roughly $16,000 in taxes and penalties. Exceptions include disability, certain medical expenses, and the Rule of 55 if you leave your job at 55 or older. Consider a 401(k) loan instead, which lets you borrow up to $50,000 without taxes or penalties.

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