How Your 401(k) Grows
A 401(k) is one of the most powerful wealth-building tools available. Your contributions lower your taxable income today (traditional) or grow tax-free (Roth), while compound interest works continuously on your growing balance.
The Power of Employer Match
Always contribute at least enough to get your full employer match — it is an instant 50%–100% return on your investment, which no other investment can match. A 50% match on 6% of a $75,000 salary adds $2,250/year of free money to your retirement.
2026 IRS Contribution Limits
- Under age 50: $23,500/year
- Age 50 and older: $31,000/year (includes $7,500 catch-up contribution)
- Combined employee + employer contributions: up to $70,000 (2026)
Frequently Asked Questions
For 2026, the IRS 401(k) contribution limit is $23,500 for employees under 50. If you are age 50 or older, you can contribute up to $31,000 (the $23,500 limit plus a $7,500 catch-up contribution). These limits apply to traditional and Roth 401(k) combined.
A common match is "50% of contributions up to 6% of salary." If your salary is $80,000 and you contribute 6% ($4,800), your employer adds 50% of that ($2,400). Always contribute at least enough to get the full employer match — it is essentially free money with an instant 50%–100% return.
Vesting determines when you own the employer contributions. Immediate vesting means you own the match immediately. Cliff vesting might require 3 years of service before you own 100%. Graded vesting phases in ownership over 2–6 years. Check your plan documents for your specific vesting schedule.
Traditional 401(k) reduces your taxable income now (good if you expect lower taxes in retirement). Roth 401(k) contributions are after-tax but withdrawals are tax-free (good if you expect higher taxes in retirement or want tax-free growth). Many financial advisors recommend a mix of both.
The historical average annual return for a diversified stock portfolio (S&P 500) is about 10% before inflation, or 7% after inflation. Conservative projections use 5–6%, moderate projections use 7–8%, and optimistic projections use 9–10%. Our calculator defaults to 7% (real return after inflation equivalent).
You can withdraw penalty-free at age 59½. Early withdrawals before 59½ are subject to a 10% penalty plus ordinary income tax (with some exceptions for disability, death, etc.). Required Minimum Distributions (RMDs) must begin at age 73 under current law.
You have four options: 1) Roll over to your new employer's 401(k), 2) Roll over to an IRA (more investment options), 3) Leave it with your former employer (if balance exceeds $5,000), 4) Cash out (not recommended — you pay taxes plus 10% penalty). Rolling to an IRA typically gives you the most investment flexibility.
Inflation erodes purchasing power over time. A $1,000,000 balance in 30 years will buy only about $411,000 worth of goods in today's dollars (at 3% inflation). Our calculator shows both the nominal balance and the inflation-adjusted (real) value so you can see your true purchasing power.