What Is a 401k?
A 401k is an employer-sponsored retirement plan that allows you to save money with tax advantages. Contributions grow tax-deferred, and many employers offer matching contributions to help grow your savings.
Key Features
- Automatic payroll deductions
- Tax-deferred or tax-free growth depending on Traditional vs Roth
- Employer match (when offered)
- Investment options such as index funds and mutual funds
2026 General Contribution Limits
- Employee Limit: $24,500 per year
- Catch-Up (Age 50–59): +$8,000 (total $32,500)
- Catch-Up (Age 60–63): +$11,250 (total $35,750)
- Catch-Up (64+): +$8,000 (total $32,500)
- Employer + Employee Combined: $72,000 max (excluding catch-up)
How 401k Loans Work
Many 401k plans allow you to borrow against your own retirement balance. Loan payments go back into your retirement account.
General IRS Rules
- Borrow up to 50% of your vested balance, capped at $50,000
- Repayment typically required within 5 years
- If you leave your employer while the loan is outstanding, you have until the due date of your federal tax return for that year to repay or roll over the balance before it becomes a taxable distribution (plus 10% penalty if under 59½).
Benefits and Considerations
Benefits
- Lower interest rates compared to credit cards and other personal loans
- Interest paid goes back to your own account
- No credit check required
- Predictable repayment schedule
Considerations
- Foregone market growth while funds are borrowed
- Loan may become taxable if not repaid after job separation
- Some plans limit contributions during repayment
- Over borrowing can reduce long-term retirement savings
Official Resources
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