If your employer offers a 401(k) and you're not using it — or not using it fully — you may be leaving thousands of dollars on the table every year. Here's everything you need to know to make the most of it.
What Is a 401(k)?
A 401(k) is an employer-sponsored retirement savings plan that lets you contribute pre-tax dollars from your paycheck. Your contributions reduce your taxable income now, and the money grows tax-deferred until you withdraw it in retirement (typically after age 59½).
The Employer Match: Free Money You Can't Ignore
Many employers match a portion of your contributions — commonly 50–100% of your contributions up to 3–6% of your salary. If your employer offers any match at all, contribute at least enough to capture the full match. Not doing so is equivalent to turning down part of your salary.
2025 Contribution Limits
The 2025 401(k) employee contribution limit is $23,500 (up from $23,000 in 2024). If you're age 50 or older, you can contribute an additional $7,500 in catch-up contributions, for a total of $31,000.
Traditional vs. Roth 401(k)
Many employers now offer both options. Traditional contributions are pre-tax (lower taxes now, pay later). Roth 401(k) contributions are after-tax (pay now, tax-free in retirement). If your employer offers a Roth 401(k), consider splitting contributions between both for tax diversification.
How to Invest Inside Your 401(k)
Most 401(k) plans offer a menu of mutual funds. Look for low-cost index funds tracking the S&P 500 or total stock market. Avoid actively managed funds with high expense ratios. If your plan offers a target-date fund (e.g., "2055 Fund"), that's a reasonable all-in-one option for hands-off investors.
🎯 Bottom line: Contribute at least enough to get the full employer match, choose low-cost index funds, and increase your contribution rate by 1% each year.