Why the 401(k) is the workhorse. A 401(k) is an employer-sponsored, tax-advantaged account funded by automatic payroll deferrals. Two features make it powerful: the money is taken out before it hits your checking account (so you never "feel" it and can't easily spend it), and it grows tax-sheltered for decades. The 403(b), 457(b), and federal TSP work almost identically — same spirit, minor rule differences — so everything here largely applies to all of them.
The match: the closest thing to free money. Many employers match a portion of what you contribute — a common formula is 50% or 100% of your contributions up to 3–6% of pay. If your employer matches 100% up to 6% and you contribute 6%, you just earned an instant 100% return on that money before any market gains. The rule that follows is simple and nearly universal: contribute at least enough to get the entire match before you fund anything else. Not doing so is declining part of your compensation.
The match, compounded
Jordan earns $80,000 and her employer matches 100% up to 6% of pay. She contributes 6% — $4,800 — and the employer adds $4,800, so $9,600 goes into her 401(k) every year. The match alone is an instant 100% return before the market does anything.
| Source (invested yearly, 30 yrs @ 7%) | In / year | Grows to |
|---|---|---|
| Her own contributions | $4,800 | $453,000 |
| Employer match | $4,800 | $453,000 |
| Total 401(k) balance | $9,600 | $906,000 |
Half of Jordan's ~$906,000 came from money she never earned. A coworker who skips the match forfeits that employer half — roughly $453,000 over the same career. That's why capturing the full match is the highest-return move in this book, and why it comes before every other dollar you invest.
The 2026 limits. The IRS sets annual caps (Notice 2025-67 for 2026): - Employee deferral: $24,500. - Catch-up (age 50+): an extra $8,000, for $32,500 total. - "Super catch-up" (ages 60–63): an extra $11,250 instead of the $8,000, for $35,750 total — a SECURE 2.0 provision, if your plan offers it. - Combined employee + employer limit: $72,000 (the ceiling on all additions to your account, including match and any after-tax contributions).
Pre-tax vs. Roth: the core choice. Most plans let you contribute pre-tax, Roth, or a blend: - Pre-tax (traditional): contributions reduce this year's taxable income; withdrawals in retirement are taxed as ordinary income. Best when you expect a lower tax rate in retirement. - Roth 401(k): contributions are made with after-tax dollars (no deduction now); qualified withdrawals are entirely tax-free. Best when you expect a higher or similar future rate — and, unlike a Roth IRA, a Roth 401(k) has no income limit, so high earners can use it. As of 2024, Roth 401(k)s also escaped required minimum distributions.
A reasonable default for younger or lower-bracket savers is Roth (lock in today's low rate); for peak-earning-years savers in high brackets, pre-tax often wins. Many people split the difference.
Vesting — your money vs. their money. Your own contributions are always 100% yours immediately. Employer contributions may be subject to a vesting schedule — you might need to stay two to six years before the match is fully yours. If you're thinking of leaving a job, check your vesting; walking away a few months early can forfeit thousands.
Two rules worth flagging. First, highly compensated employees (earning $160,000+ in 2026) can face plan-testing limits on how much they defer. Second, a SECURE 2.0 change effective 2026 requires anyone whose prior-year wages from the employer exceeded $150,000 to make their catch-up contributions on a Roth basis — you still get the catch-up, but lose the upfront deduction on it (and if your plan offers no Roth option, you may lose the ability to make catch-ups at all).
The mega backdoor (a bonus for some plans). A minority of plans allow after-tax contributions beyond the $24,500 deferral, up to the $72,000 total limit, which you can then convert to Roth — the "mega backdoor Roth" (Chapter 3). If your plan supports it and you have income to spare, it's a way to shovel large sums into Roth.
When you leave. A 401(k) stays yours after you leave the employer. Your options: leave it in the old plan, roll it into your new employer's plan, or roll it to an IRA. Rolling to an IRA opens up more investment choices and often lower fees — but, as Chapter 25 warns, it can also forfeit the Rule of 55 (penalty-free access at 55+). Don't roll reflexively; decide based on your age and access needs.
For the self-employed: the Solo 401(k)
A 401(k) for a business of one. If you're self-employed with no employees other than a spouse — a freelancer, consultant, sole proprietor, or single-owner LLC or S-corp — you can open a Solo 401(k) (also called an individual or one-participant 401(k)). It works like a workplace 401(k), but you play both roles: employee and employer. That dual capacity is what makes it the most generous option for a solo operator.
You contribute twice. For 2026 you can put in: - As the employee: the same elective deferral as any 401(k) — up to $24,500, plus the $8,000 catch-up at 50+ or the $11,250 super catch-up at 60–63 — and you can choose pre-tax or Roth, just as at a job. - As the employer: a profit-sharing contribution of up to 25% of your compensation (for a sole proprietor, that works out to roughly 20% of net self-employment income, after the deduction for half your self-employment tax). - Combined, capped at $72,000 — the same all-in ceiling as a workplace 401(k) — plus any catch-up on top.
Why it beats a SEP-IRA for most solo earners. A SEP-IRA (Chapter 2) is capped purely at that ~20%-of-income employer piece. The Solo 401(k) stacks the flat $24,500 employee deferral on top, so you reach a much bigger number at a much lower income. It also offers a Roth option and often allows plan loans, neither of which a SEP does.
The deferral advantage
Priya is a freelance designer with $100,000 of net self-employment income and no employees. Compare her two solo options at the same income:
| Contribution | Solo 401(k) | SEP-IRA |
|---|---|---|
| Employee deferral | $24,500 | — |
| Employer profit-sharing (20% of net) | $18,600 | $18,600 |
| Total sheltered in 2026 | $43,100 | $18,600 |
Same income, same 20% employer piece — but the Solo 401(k)'s $24,500 employee deferral lets Priya shelter $43,100 versus $18,600, more than double. On a lower income the gap is starker still, because the deferral is a flat dollar amount, not a percentage of earnings.
The catch: no employees. The Solo 401(k) is strictly for owner-only businesses (you and a spouse are fine). The day you hire a non-spouse full-time employee, you must move to a plan that covers them. Two practical notes: you generally must establish the plan by year-end to make employee deferrals for that year (the employer piece can wait until your tax deadline), and once the balance tops $250,000 you file a short annual Form 5500-EZ.