The 401(k) has come a long way since 1978 when Congress tweaked the tax code and jumpstarted the employee-driven retirement savings revolution. Today, 401(k) retirement accounts are the savings vehicle of choice for American workers looking to grow their nest egg, generate wealth, and live comfortably in retirement.
More than one-third of workers now have a 401(k)-style account. That’s nearly double the number of savers with IRAs and triple the number of workers with old-styled pensions, or defined benefit plans. The latest report, "How America Saves" released in 2024 by Vanguard, shows the average 401(k) balance across all age groups is $134,128. However, the average balance — $91,281 — is much lower for those aged 35 to 44.
Given that just 11% of workers in private industry receive a pension, 401(k)s are a key pillar in building a secure retirement. In fact, these tax-advantaged accounts remain the backbone of most people’s retirement saving strategy. “For everyday Joe’s and Jane’s, 401(k) plans are an essential piece to building retirement wealth,” says Jason Grover, founder and financial planning specialist at Grover Financial Services.
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And when you consider that participants in workplace retirement plans believe they’ll need to save $1.2 million to retire comfortably, according to Schroders 2024 U.S. Retirement Survey, it’s a long shot for most Americans to achieve that goal without investing in a 401(k) plan. In fact, only 29% believe they’ll reach the $1-million mark.
“401(k) savings is critical to hitting your retirement goals, whatever your magic (savings) number is,” says Deb Boyden, head of U.S. defined contribution at Schroders, an asset management firm. That’s especially true, Boyden adds, now that the three-legged stool most retirees once relied on to pay bills — Social Security, a pension, and personal savings — is now down to two sources of income amid the demise of traditional pensions, which guaranteed a set paycheck for life. It’s now the job of the 401(k) to help create a steady stream of income in retirement.
What is a 401(k) plan?
A 401(k) is a tax-friendly retirement plan that lets you save a portion of your paycheck and invest in assets like mutual funds. Many workers elect to invest in age-based target-date funds in their 401(k)s, which get more conservative the closer you get to retirement. Most large employers offer 401(k)s as part of their benefits package, with eight of 10 plan sponsors allowing employees to participate in the plan immediately after being hired, according to Vanguard.
But not every type of worker has access to a 401(k). For example, workers in non-profit organizations or public schools and colleges can contribute to 401(k)-like plans, such as a 403(b). Government workers typically have 457 plans.
What types of 401(k)s are there?
There are two types of 401(k)s.
Traditional 401(k)s allow you to contribute with pre-tax dollars, which means you get a tax deduction upfront and won’t have to pay taxes until you withdraw the money. Select this type of plan if you earn a large salary or are in your peak earning years to offset taxes.
Roth 401(k)s are funded with after-tax dollars, which means you’ll pay zero taxes when you take the money out in retirement. A Roth is a better choice if you expect to be in a higher tax bracket in retirement than you are now.
How do I take money out of a 401(k)?
Generally, you must wait until age 59 ½ to withdraw funds from a 401(k) without paying a penalty or taxes. 401(k)s have other perks, such as employer-matching contributions and the ability to take loans against your account balance. Another big plus is if you leave a job after age 55, you can take money out of your 401(k) without paying a penalty, although you will have to pay taxes on any distribution from a traditional 401(k).
How do you contribute to a 401(k)?
In 2024, workers can contribute $23,000 to their 401(k) plans, and employees over age 50 can sock away an additional $7,500 in so-called “catch-up contributions.” In 2025, workers can contribute $23,500, but the catch-up contribution of $7,500 will remain the same.
And thanks to the Secure 2.0 Act, starting Jan. 1, 2025, individuals 60 to 63 years old in workplace retirement plans will be able to make catch-up contributions of up to $11,250 annually.
Most people don't make the full annual contribution to their 401(k) plan, even if they want to. As of March 31, 2024, the average amount invested in a 401(k) was $134,128. That may sound like a lot or a little, depending on how far away you are from retirement. It stands to reason that average 401(k) balances differ significantly by investor age. To see a ballpark retirement number for your particular age and circumstances, check out our retirement calculator.
What are the disadvantages of 401(k) plans?
There are three main drawbacks to 401(k)s. First, they have a more limited menu of investments to choose from compared to IRAs and brokerage accounts. Your investment choices are limited by the options chosen by your employer. Second, non-Roth (traditional) accounts must take IRS-mandated required minimum distributions (RMDs) each year starting at age 73.
Finally, the value of these accounts can be adversely impacted due to market volatility. What’s more, withdrawals of traditional 401(k)s are taxed at ordinary income rates, which could be higher once retirement rolls around.
Are 401(k)s really worth it?
The short answer? Yes, a 401(k) plan will be worth it for most investors. Here are five advantages to consider.
1. 401(k)s make it easy to automate savings
Pay yourself first is a personal finance mantra. Deducting money from your paycheck and depositing it into your 401(k) on a regular basis puts your savings on autopilot. “401(k)s help you automate your savings in a simple way,” says Roger Young, senior financial planner at T. Rowe Price. And many companies automatically enroll retirement savers into the plan. Starting in 2025, the Secure 2.0 Act requires businesses to automatically enroll eligible employees into the 401(k) plan, beginning with a contribution rate of at least 3%.
Most plans today also give you the option to automatically bump up your savings each year. So, if you start saving 6% of your pay, you could elect to have the plan increase your contribution by an additional 1% per year. “Even if you can’t save as much as you’d like right now, you can set in motion to save a higher percentage (of your pay) later,” says Young.
These two perks (automating your savings and increasing the savings amount each year) can pay off in the long run. These practices remove emotion from investing. Grover explains that such dispassionate saving can help investors avoid shooting themselves in the foot by removing the kind of behavioral biases that lead to investment blunders. “Putting your savings on autopilot takes the decision-making away from the individual,” adds Grover.
2. Employer matches boost savings
Most employers help you save more by making contributions to your account. The average 401(k) match is between 4% and 6% of pay, according to investment platform Carry. The most common is a 50% match contribution up to 6% of salary. So, if you earn $100,000 and save 6%, or $6,000 in your 401(k), you’ll get a company match of $3,000.
Employer-matched contributions are not counted toward the total you can contribute to your 401(k) each year.
All of the money that you contribute to your 401(k) is yours to keep. However, if your employer says that they have "vesting" rules, that means that you may not keep the amount your employer deposits (or matches) in your account if you leave the company before a certain amount of time has passed. It's one way that employers may try to reduce turnover.
3. 401(k) tax benefits
All contributions to a traditional 401(k) lower your taxable income by the same amount. So, if you earn a salary of $100,000 and you max out your 401(k) with $23,500 in contributions in 2025, your taxable income falls to $76,500. Since the IRS boosted the standard deduction on Form 1040, it’s harder for Americans to itemize deductions on their return and net tax savings. “The traditional 401(k) is really the last beacon for reducing one’s tax bill,” says Grover.
4. Helps workers invest for retirement
Building wealth requires investing in assets that provide larger returns over time than savers can earn by stuffing cash under the mattress. And the mutual funds and other types of funds in 401(k) plans that invest in stocks and bonds provide the growth in account balances that retirees need. Both mutual funds, as well as target-date funds that determine your mix of stocks, bonds, and other assets based on your age, are managed by professional stock pickers. And that's a huge plus, adds Boyden. “All of your money is going to be professionally managed, and that helps take some of the onus off of the plan participant."
5. Complements Social Security and other income sources
With pensions on the brink of extinction, 401(k)s are even more important to savers, as it is a key leg in what is now a two-legged savings stool, says Boyden. If most workers don’t get a pension, the 401(k) has to do more of the heavy lifting. “The shift away from pensions underscores the importance of 401(k)s for future retirement security,” says Boyden.
By relying on your 401(k) savings in early retirement, you may delay starting Social Security benefits, thereby increasing your monthly checks. And while Social Security benefits are not going away, future funding shortfalls may lower your benefit amount. In that event, your 401(k) will become even more essential.
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