How to Invest in a 401(k)

Then, the SECURE 2.0 Act of 2022 adjusted the age of required minimum distributions from 72 to 73.⁴

Named after the section of the tax code that describes them, 401(k)s are retirement plans offered by employers.⁵ Your employer decides on key features of the 401(k) plan, such as when employees become eligible to contribute and whether the company will contribute matching funds. The employer also chooses a plan provider, which is a financial-services company that administers the plan and offers the plan’s investment options.⁶

As an employee, you decide how much to invest and which of the investment options to choose. You may need to sign up for the 401(k) plan before you can contribute, although many companies now enroll employees automatically and may even select default contribution rates and investment options.⁶ Some plans let you start contributing as soon as you join the company, but others may make you wait as long as a year.

If you’re a part-time employee, the SECURE Act makes it more likely that you’ll be able to invest in a 401(k) plan. The law now requires employers with a 401(k) plan to offer it to any employee who worked more than 1,000 hours in a single year or 500 hours per year for three consecutive years, except in the case of collectively bargained plans – a 401(k) plan with terms negotiated by the employer and a group of employees or a union.⁷

The maximum amount you can invest in a 401(k) increases in some years to keep up with inflation. For the 2025 tax year, you can contribute up to $23,500, an increase of $500 over 2024.³ If you’re 50 or over, you can make additional “catch-up” contributions of up to $7,500 in 2025, raising the total to $31,000.

Thanks to the SECURE Act, you can now continue investing in your 401(k) for as long as you continue working – even if you work well past the traditional retirement age. If you are 60, 61, 62, or 63, the “catch-up” limit is $11,250.³

Many employers make matching contributions when employees invest in their 401(k), which provides an additional incentive to save as much as you can. Some employers also add “non-matching” funds that are independent of the employee’s contribution. The total limit on the combined employer and employee contributions was $69,000 in 2024, or $76,500 if for catch-up contributions.⁸

Depending on the 401(k) plan, you may only earn the employer-contributed portion over time, a process that’s called “vesting.” If you leave your employer before you’re fully vested, you’ll keep all your own contributions but may get only part of the company’s contributions.⁹ Some plans immediately vested employees in employers’ matching contributions, while others can take up to six years to fully vest an employee.¹⁰

There are two main kinds of 401(k) plans, which differ in when they provide you with a tax break.

Traditional 401(k).

As the name suggests, this is the original and most common type of 401(k) plan. With a traditional 401(k), you get a tax break when you contribute. Your contributions are taken from your paycheck before taxes are deducted, so they reduce your taxable income. Your money also grows tax-free while it’s in the 401(k) plan. However, you’ll pay income tax on the money you take out.¹¹

Roth 401(k).

You get a tax break when you withdraw the money, but not when you contribute – the opposite of a traditional 401(k). You pay taxes on the money that you invest in the plan, but you can withdraw money tax-free when you retire.¹¹

Some companies may offer Roth 401(k) options in addition to traditional 401(k) plans. You can choose one or the other, or contribute to both, as long as the combined total doesn’t exceed the 401(k) contribution limit of $23,500 for 2025 (or $31,000 if you’re 50 or more).^12,13 You may pay less tax overall with a traditional 401(k) if you expect to be in a lower tax bracket after you retire – which may be the case if, like many people, you earn less after retirement. If not, you could pay less tax with a Roth 401(k).

It’s important to think carefully when deciding which investment options to choose within your company’s 401(k) plan, because the decisions you make now may affect how comfortably you’ll be able to live when you retire.

It’s common for 401(k) plans to offer a range of mutual funds.¹⁴ The funds invest in collections of stocks, bonds, or other financial assets. Some of the funds may aim for higher growth (which comes with higher risk), while others take a more conservative approach. Many plans include target-date funds, which alter the mix of assets to become more conservative as you approach retirement and have less time to recover if the value of your 401(k) falls.¹⁵

When withdrawing money from your 401(k), it can help to pay attention to some important guidelines. For example:

To withdraw money invested in your 401(k) without paying a penalty, you have to be at least 59½ years old.¹⁶ With a Roth 401(k), there’s an additional requirement for penalty-free withdrawals: You must have had money in the plan for at least five years. Otherwise, the penalty is 10% of the withdrawal amount.¹⁷

Eventually, you’re required to start withdrawing from your 401(k). With either a traditional or Roth 401(k) plan, you must start withdrawing money at age 73 if you haven’t already done so.¹⁸

You’ll have to withdraw at least a minimum amount each year. Once you’re required to withdraw money from your 401(k), you must meet the Required Minimum Distribution (RMD) each year. Your RMD is calculated based on the balance in your retirement plan and your life expectancy.¹⁹ You’re also required to do this with money in a Roth 401(k), but you may be able to avoid the requirement by rolling the money into a Roth individual retirement arrangement (IRA), which isn’t subject to RMDs during the owner’s lifetime.¹⁹

If you leave your job, you have several options for your 401(k).  Alternatively, you can “roll over” the money into your new employer’s 401(k) plan, or into an IRA.²⁰