What Is a 401(k) — How It Works, Contribution Limits, and Employer Matching in 2026
The 401(k) is the cornerstone of retirement saving for more than 70 million American workers. Named after a section of the Internal Revenue Code that took effect in 1978, employer-sponsored 401(k) plans have grown into the dominant vehicle for building long-term wealth — holding roughly $8.9 trillion in assets as of late 2025, according to the Investment Company Institute. Whether you are just starting your career or approaching retirement, understanding how these accounts work is one of the most consequential financial decisions you will make. For 2026, the IRS has set the employee contribution limit at $23,500 for workers under 50, with catch-up contributions of $7,500 available for those aged 50 and older — bringing the maximum employee deferral to $31,000. A new "super catch-up" provision under the SECURE 2.0 Act now allows workers aged 60 to 63 to contribute an additional $11,250 in catch-up contributions, for a total employee deferral of up to $34,750. These limits, combined with the Federal Reserve's ongoing rate-cutting cycle — the federal funds rate has fallen from 4.33% in August 2025 to 3.64% in January 2026 — make it an important time to revisit your retirement savings strategy. This guide breaks down everything you need to know about 401(k) plans: how contributions work, the power of employer matching, tax advantages, investment options, and the rules around withdrawals and rollovers. We will also cover how the 401(k) compares to other retirement accounts like IRAs and Roth 401(k)s, so you can make the most informed decisions about your financial future.