Key Takeaways
- A 401(k) might be your best bet for saving more for retirement.
- A recent study shows that people with 401(k)s were able to save 29% more for retirement than their peers who did not have the same type of account.
- 401(k) plans are often sponsored by employers, but even if you’re self-employed, you can open one for yourself.
- These plans offer tax-deferred investing, a smart approach to regular contributions, compounding interest, and other tax advantages.
- Your employer might provide a matching contribution up to a certain percent of your salary.
Choices for saving for retirement are plentiful, but a 2025 survey conducted by Goldman Sachs Asset Management indicates that one plan in particular can be a huge asset—the 401(k) plan. If you have access to a 401(k) plan, you may be able to accumulate 29% more in retirement savings compared to those without access.
A 401(k) retirement plan is generally sponsored by employers, and some companies are even willing to match the money an employee contributes to it.
If your employer doesn’t offer a 401(k) plan, don’t worry. You still have options.
401(k)s Could Mean More Savings for Retirement
Tax advantages, plus employer matches, can play big roles in saving for retirement—and 401(k)s typically come with both. According to the report, savers with a 401(k) reported having a higher savings rate relative to income. They also said they felt more prepared for retirement and felt like they were more likely to reach their retirement savings goals, thanks to having a 401(k).
A 401(k) Offers Tax Advantages
A traditional 401(k) offers a nice tax perk: you make pretax contributions. and the money in your account is tax-deferred. That is, you don’t have to pay income tax on what you contribute to the plan until you start withdrawing from it. So your money can grow undiminished by taxes for years, even decades.
And that’s not all. You can also deduct the amount you contribute from your taxable income. For example, if your weekly paycheck is $1,500 and you contribute $75 of that to your 401(k), your employer will calculate your tax obligation on $1,420. You don’t have to report that $75 on your tax return. If you stay consistent week after week, that works out to $3,900 ($75 x 52) of your annual income that’s shielded from taxes for years. And the interest your account accumulates isn’t taxed, either.
Important
You won’t have to pay capital gains tax on your account’s growth over the years, either.
A Roth 401(k), on the other hand, works differently. You don’t get an up front tax break, but your withdrawals are tax-free, as long as you’re older than 59 ½.
“Some plans offer a Roth 401(k) option where contributions are made after tax,” says Myles Zueger, a wealth advisor at Adams Wealth Partners. “Withdrawals in retirement can then be completely tax-free if you follow the rules. Many people split contributions between traditional and Roth accounts to keep their tax options open. The choice comes down to this: Do you want to reduce taxes now or later?”
It’s important to remember, though, that if you make withdrawals from your account before you reach the age of 59½, you’ll pay a 10% tax penalty. The Internal Revenue Service (IRS) does allow a few exceptions, including in cases of disability, the birth or adoption of a child, first-time home purchases, and the effects of federally-declared disasters. The list of exceptions is extensive, so be sure to consult the IRS website.
A 401(k) Match: Extra Savings from Your Employer
If your employer offers matching contributions, it’s wise to take advantage of them, if you can.
Here’s how that could work. Remember our example above? You earn a weekly paycheck of $1,500 and contribute $75 of that to your traditional 401(k). That $75 is 5% of your paycheck. The average employer match is 4.6%, but let’s say your employer’s policy was 5%. That would mean your employer would match your contribution (that is, contribute the same amount that you contribute) up to a certain percentage of your salary. In this case, it’s 5%. So every paycheck, $150 would be contributed to your 401(k): $75 from you, and $75 from your employer. If you contributed $225 a week (15% of your salary), though, your employer would still contribute $75, since 5% of your salary is the limit.
There can be a bit of a catch here, however. Employer matches are often tied to a vesting schedule. That means you only get to keep this money if you remain employed with the company for a certain period of time (unless you’re participating in a safe harbor or SIMPLE plan). That said, your contributions are always 100% yours.
There’s a Limit to How Much You Can Contribute to Your 401(k)
The IRS places limits on how much you can contribute to your 401(k) every year. It’s adjusted annually to keep pace with inflation.
If you’re age 49 or younger, you can contribute up to $23,500 to your 401(k) plan in 2025, and $24,500 in 2026. You can contribute an additional $7,500 if you’re age 50 or older, or an extra $11,250 if you’re age 60, 61, 62, or 63. This increases by $500 in 2026.
Matches made by your employer don’t count toward this limit, but they have their own caps. Depending on your age, the total amount contributed to your account in 2025 (that is, your own contributions combined with your employer’s matching contributions) can’t exceed $70,000, $77,500, or $81,250, respectively.
You’ll want to maximize your contributions as much as possible, up to these limits. Fidelity Investments suggests a goal of 15% of your income before taxes, including your employer’s matches, if any.
Zueger recommends working upward from there. “Increase gradually,” he says. “Boost your contributions by 1% each year.”
If You’re Self-Employed, You Have Options
Say you’re self-employed, or you work for a company that doesn’t offer a 401(k) plan. You have a couple of options.
If you own a business with no employees, you can set up a one-participant or solo 401(k). The rules are the same for this type of plan as for an employer-sponsored 401(k), but in this case, you’re both the employer and the employee. You can therefore make contributions up to your individual limit and add an employer match, as well.
You could also contribute to an individual retirement account (IRA). You can’t save as much annually to an IRA, however. For 2025, the IRS contribution limit is just $7,000 per year if you’re younger than age 50, increasing by an additional $1,000 if you’re age 50 or over.
IRAs are available in both traditional and Roth versions. You can set one up for yourself or have a financial professional do it for you. Bear in mind that if you have a 401(k) at work, you can also open up a personal IRA. By doing so, and contributing regularly to both, you’ll amplify your total tax-advantaged savings.
The Bottom Line
The time to begin preparing financially for your retirement years is now, even if they seem to be way out there on a distant horizon. A 401(k) can be a good savings choice, putting you ahead in the game.
“A 401(k) isn’t just another line on your paycheck,” says Zueger. “It can be one of the most important parts of your long-term financial independence. Whether through maximizing contributions, using employer matches, or building your own retirement plan as a business owner, consistency and clarity are key.”
