Financial Term

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax salary (or after-tax salary for Roth 401(k) contributions). Many employers match a percentage of employee contributions. For 2026, the employee contribution limit is $23,500, with an additional $7,500 catch-up contribution for those age 50 and older.

Why It Matters

For most working Americans, a 401(k) is the largest single retirement asset they'll accumulate. Understanding your plan's features — match formulas, investment options, Roth vs. traditional contributions, and eventually rollover decisions — directly impacts how much money you'll have in retirement.

The decisions you make when leaving an employer (rollover to IRA, leave in the plan, or cash out) are among the most consequential one-time financial decisions you'll face. For Arizona's major employers — Boeing in Mesa, Intel in Chandler, Banner Health across the Valley — these rollover decisions involve plan-specific nuances that require careful analysis.

How It Works

Employee contributions: Pre-tax (traditional) or after-tax (Roth) contributions up to $23,500 in 2026. Employees age 50+ can contribute an additional $7,500 catch-up.

Employer match: Many employers match contributions, commonly 50% to 100% of the first 3-6% of salary. This is free money — always contribute enough to get the full match.

Investment options: Plans offer a menu of mutual funds, target-date funds, and sometimes company stock. Options and fees vary significantly between employers.

Vesting: Employer matching contributions may be subject to a vesting schedule — meaning you must work for a certain period before the match is fully yours.

Loans and hardship withdrawals: Most plans allow loans up to $50,000 or 50% of the vested balance. Hardship withdrawals are available in some circumstances but trigger taxes and potentially a 10% penalty.

At separation: When you leave an employer, you can: (1) roll over to an IRA, (2) roll over to your new employer's plan, (3) leave the money in the old plan, or (4) cash out (triggers taxes + possible penalty).

Example

A 50-year-old Chandler tech worker earning $150,000 contributes the maximum $31,000 ($23,500 + $7,500 catch-up) to their 401(k). Their employer matches 50% of the first 6% of salary, adding $4,500. Total annual contribution: $35,500. Over 15 years with 7% average growth, this could accumulate to approximately $900,000 — before accounting for any existing balance. At retirement, the decision to roll this into an IRA vs. leave it in the plan has implications for investment options, fees, creditor protection, and withdrawal flexibility.

401(k) in Arizona

Arizona's major employers have distinct 401(k) plans. Boeing's plan offers a pension component alongside the 401(k), making the rollover decision more complex. Intel offers RSU and ESPP programs alongside its 401(k), creating stock concentration risk. Banner Health uses a 403(b) plan with different rules. Understanding your specific employer's plan is essential before making rollover decisions.

Common Questions About 401(k)

Should I roll over my 401(k) to an IRA when I retire?

It depends on your plan's fees, investment options, and your specific needs. IRA rollovers typically offer more investment choices and potentially lower fees. However, some 401(k) plans offer institutional fund classes with lower expense ratios, creditor protection under ERISA, and the ability to take penalty-free withdrawals starting at age 55 (if you separated from service at 55+). A financial advisor can compare your specific plan against IRA alternatives.

What happens to my 401(k) if I leave my job?

You have four options: roll it into an IRA, roll it into your new employer's plan, leave it in the old plan (if allowed), or cash it out. Cashing out triggers income tax plus a 10% penalty if you're under 59½. Most financial advisors recommend a rollover to an IRA for maximum control and investment flexibility, but each situation is different.

How much should I contribute to my 401(k)?

At minimum, contribute enough to get your full employer match — otherwise you're leaving free money on the table. Beyond that, aim to save 15-20% of your gross income for retirement (including employer contributions). If you're behind on savings, maximize the catch-up contribution ($7,500 additional if you're 50+). The 2026 employee limit is $23,500.

Related Terms

Traditional IRA

A traditional IRA is an individual retirement account where contributions may be tax-deductible in the year they're made...

Roth IRA

A Roth IRA is an individual retirement account funded with after-tax dollars. Contributions are not tax-deductible, but ...

Roth Conversion

A Roth conversion is the process of moving funds from a traditional IRA, 401(k), or other pre-tax retirement account int...

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