A 401(k) Plan: Paving the Road to Retirement

There's a lot to like about a 401(k) plan. Whether you already participate in your employer's plan or you're just now thinking about joining, reviewing the benefits as enrollment time approaches is a smart idea.

The Pretax Advantage

When you participate in a traditional 401(k) plan, your contributions to the plan are taken out of your pay before income taxes are deducted, thus lowering your taxable income. Your plan contributions and any earnings grow tax deferred until you withdraw them, typically at retirement, when you may be in a lower tax bracket than you are now. And with automatic payroll deduction, contributions to your employer's plan come out of your paycheck before you are tempted to spend the money.

The Benefits of a Match

Most employers match employee contributions up to a certain percentage. That's like getting "free money." All the funds you contribute to the plan belong to you right from the start. Over time, all your employer's contributions will also belong to you, based on a vesting schedule outlined in your employer's plan documents. Remember, the sooner you start contributing to your plan, the longer you'll have to benefit from compounding – earning interest on both contributions and earnings.

Tax Deduction

You have until December 31, 2025, to make contributions to a 401(k) to lower the taxable income on your 2025 income tax return, so consider contributing as much as possible. The maximum 401(k) plan contribution limit in 2025 is up to $23,500. However, if you're aged 50-59 you can add an additional $7,500 in catch-up contributions, bringing the total to $31,000. New in 2025, that catch-up contribution amount increases to $11,250 if you are age 60-63, for a total annual contribution of $34,750.

A Word About Roth 401(k)s

Your employer may also offer a Roth 401(k) option. Roth contributions are made with after-tax funds, so withdrawals are tax-free, provided all requirements are met. A Roth 401(k) may be a good option if you expect to be in a higher tax bracket after retirement.