401(k) Plans Explained

A 401(k) is an employer-sponsored retirement savings plan that lets you set aside a portion of each paycheck before or after taxes, invest it in a menu of funds, and let it grow until retirement. Named after the IRS tax code section that created it, the 401(k) is the primary retirement savings vehicle for most U.S. workers — and understanding how the three contribution types work, how they are taxed, and what your employer contributes is essential to building an efficient financial plan.

The Three Types of 401(k) Contributions

Most modern 401(k) plans support three distinct contribution types, each with different tax treatment. Many employees are only aware of the first two.

1. Pre-Tax (Traditional) 401(k)

Pre-tax contributions are deducted from your paycheck before federal and state income taxes are calculated. The money goes into your account gross, grows tax-deferred, and is taxed as ordinary income when you withdraw it in retirement.

• Tax benefit now: Every dollar you contribute directly reduces your taxable income for the current year. If you are in the 24% federal bracket and contribute $10,000, you save $2,400 in federal taxes immediately.
• Tax in retirement: Withdrawals are taxed as ordinary income at whatever rate applies in the year you take the money out.
• Required Minimum Distributions (RMDs): Under SECURE 2.0, RMDs generally begin at age 73. However, employees who are still working and are not 5% owners of the company may be able to delay RMDs from their current employer's 401(k) until they retire, depending on plan terms. IRA and former-employer 401(k) accounts do not qualify for this delay.
• Best for: Employees who expect to be in a lower tax bracket in retirement than they are today — common for high earners in peak career years.

2. Roth 401(k)

Roth 401(k) contributions are made with after-tax dollars — you pay income tax on the money now. In exchange, the account grows completely tax-free, and qualified withdrawals in retirement are 100% tax-free, including all investment gains.

• Tax benefit later: No taxes on growth or withdrawals after age 59½ (provided the account has been open at least 5 years).
• No RMDs: Since SECURE 2.0 (effective 2024), Roth 401(k) accounts are no longer subject to required minimum distributions during the owner's lifetime, matching the longstanding Roth IRA rule.
• Same contribution limit: Pre-tax and Roth contributions share the same annual employee limit — you can split between the two in any proportion.
• Best for: Employees who expect to be in a higher tax bracket in retirement, early-career workers whose income will grow significantly, or anyone who values tax-free income in retirement for planning flexibility.

3. After-Tax 401(k) and the Mega Backdoor Roth

After-tax contributions are a third bucket available in some 401(k) plans, separate from both pre-tax and Roth contributions. They are made with after-tax dollars and the earnings grow tax-deferred (not tax-free) — a less favorable treatment than Roth. However, their real power lies in what you can do next.

If your plan allows in-plan Roth conversions or in-service withdrawals, you can immediately convert after-tax contributions to Roth. This is the Mega Backdoor Roth strategy — it allows you to move up to roughly $47,500 extra per year (the gap between the employee limit and the total IRS limit) into Roth-equivalent status. For high earners who have maxed out their pre-tax and Roth contributions, this is one of the most powerful tax planning moves available.

• Availability: Not all 401(k) plans support after-tax contributions or in-plan conversions. This is a plan design choice made by the employer.
• Notable companies offering it: Microsoft, Google, Apple, and several other large tech companies support the Mega Backdoor Roth in their plans.

How Pre-Tax 401(k) Contributions Lower Your Taxable Income

This is one of the most direct and immediate tax levers available to employees. When you contribute to a traditional 401(k), your employer reduces your W-2 box 1 (federal wages) by the contribution amount. That income is deferred for federal income tax purposes — you owe no federal income tax on it today, though it does still appear on your W-2 and remains subject to FICA taxes.

Example: Suppose you earn $200,000 and contribute $24,500 to a pre-tax 401(k). Your federal taxable income drops to $175,500 before any other deductions. At a marginal rate of 32%, that contribution alone saves you approximately $7,840 in federal income tax for the year.

The savings compound over time: the money you would have paid in taxes stays invested and grows, further increasing the long-run advantage of pre-tax contributions over taxable savings.

An Important Distinction: FICA Taxes Still Apply

Pre-tax 401(k) contributions reduce federal and state income tax, but they do not reduce FICA taxes (Social Security and Medicare). You still pay 6.2% Social Security tax (up to the annual wage base) and 1.45% Medicare tax (plus 0.9% Additional Medicare Tax above $200,000 for single filers) on your full gross compensation including the 401(k) contribution. This is different from HSA contributions made through payroll, which do avoid FICA.

State Income Tax: Important Nuances

Federal tax treatment of 401(k) contributions is uniform nationwide, but state treatment varies significantly and is often overlooked.

• No state income tax: Residents of Texas, Florida, Nevada, Washington, Wyoming, South Dakota, and Alaska pay no state income tax at all. Pre-tax contributions provide no state tax benefit — because there is no state income tax — but withdrawals in retirement are also state-tax-free, which can be a significant advantage.
• States that follow federal treatment (most states): The majority of states, including California, New York, Illinois, and others, allow the same pre-tax deduction as the federal government. If you contribute $24,500 pre-tax in California and are in the 9.3% state bracket, you save an additional ~$2,279 in California income tax on top of your federal savings.
• Pennsylvania: Pennsylvania is a notable exception — it does not recognize 401(k) pre-tax contributions. PA taxes wages at a flat 3.07%, and 401(k) contributions are not excluded from PA taxable wages. However, there is a silver lining: because contributions were already taxed by PA, qualified 401(k) withdrawals in retirement are generally exempt from PA income tax. This creates a "pay tax now, withdraw tax-free" outcome for PA residents — similar to Roth treatment at the state level.
• New Jersey: New Jersey follows federal treatment for 401(k) plans specifically — employee contributions are excluded from NJ taxable wages. This distinguishes 401(k)s from certain other deferred-compensation arrangements that NJ does not recognize. NJ also generally exempts qualified 401(k) distributions from NJ income tax in retirement, making the pre-tax benefit favorable on both ends for NJ residents.
• States with flat income tax: States like Colorado (4.4%), Georgia (5.49%), and others apply a flat rate to the same federal taxable income base, meaning the pre-tax 401(k) deduction flows through automatically and reduces state taxes proportionally.
• States that tax retirement income differently: Some states — including Illinois, Mississippi, and Pennsylvania — fully exempt 401(k) distributions from state income tax, which can make pre-tax contributions especially valuable for residents planning to retire in those states. Others, like California and New York, tax retirement distributions as ordinary income just as they do wages.

Understanding your state's treatment matters for deciding how to split contributions between pre-tax and Roth. A Pennsylvania resident, for example, may lean toward pre-tax contributions knowing that qualified withdrawals will likely be state-tax-free in retirement, effectively getting deferred tax treatment at both ends.

401(k) Contribution Limits for 2026

The IRS adjusts 401(k) limits annually for inflation. For 2026, the limits are:

• Employee elective deferral limit (pre-tax + Roth combined): $24,500. This is the maximum you can contribute from your own paycheck across all 401(k) and 403(b) accounts combined.
• Catch-up contribution (age 50–59 and 64+): An additional $8,000, bringing the total employee contribution to $32,500.
• Enhanced catch-up (age 60–63): Under SECURE 2.0, employees aged 60 through 63 can contribute an enhanced catch-up of $11,250 (instead of $8,000), for a total employee contribution of $35,750. This provision took effect in 2025.
• Total annual additions limit (Section 415): $72,000 per year (or 100% of compensation, whichever is less), covering all contributions from all sources — employee pre-tax, employee Roth, employee after-tax, and all employer contributions (match + profit sharing). Catch-up contributions are not counted within this $72,000 ceiling — they sit on top of it as a separate allowance for eligible employees.

The $72,000 total limit is what defines the ceiling for the Mega Backdoor Roth strategy: if you contribute $24,500 in pre-tax/Roth and your employer adds, say, $10,000 in matching contributions, you have up to $37,500 remaining for after-tax contributions (subject to your plan's rules). Always verify the current year's IRS limits at irs.gov, as they are typically updated each November.

401(k) Plans at Major Tech Companies

Employer matches and vesting schedules vary significantly. Company match is part of your total compensation — it is worth understanding and accounting for when comparing job offers.

Microsoft

Microsoft matches 50% of every pre-tax and/or Roth dollar contributed, up to the IRS annual basic deferral limit. For 2026, that means if you contribute the full $24,500, Microsoft adds $12,250 — one of the highest effective match ceilings in the industry. Matching contributions vest immediately. Microsoft's plan also supports after-tax contributions with in-plan Roth conversion, enabling the Mega Backdoor Roth for employees who want to maximize tax-advantaged savings.

Apple

Apple matches 100% of the first 6% of eligible compensation, making it one of the more generous dollar-for-dollar matches in the industry. Vesting is immediate for matching contributions. Apple's 401(k) plan through Fidelity includes a broad fund selection and supports the full $72,000 total contribution limit via after-tax contributions and in-plan Roth conversions (Mega Backdoor Roth). For high-earning Apple employees receiving RSUs, maximizing the 401(k) match and after-tax bucket is an important layer of their compensation optimization.

Meta (Facebook)

Meta provides a dollar-for-dollar match up to $10,000 per year in employee contributions — a fixed cap rather than a percentage of salary. This structure benefits employees at all compensation levels equally. Vesting on matching contributions is immediate. Meta's plan also supports after-tax contributions, allowing high earners to execute the Mega Backdoor Roth strategy on top of the standard limit.

Amazon

Amazon matches 50% of employee contributions up to 4% of eligible compensation, for a maximum employer match of 2% of salary. Unlike many peers, Amazon's matching contributions have a vesting schedule: contributions vest over 3 years (20% after year 1, 40% after year 2, the remaining 40% after year 3, with exact terms subject to change). Employees who leave before full vesting forfeit the unvested match. Given Amazon's RSU-heavy compensation model, the 401(k) match represents a smaller share of total compensation than at some peers.

Netflix

Netflix does not emphasize its 401(k) match as a key benefit, consistent with its philosophy of paying high base salaries instead. Netflix offers a 401(k) with a match, but the details are less prominent in recruiting materials than peers. Netflix's distinctive compensation model — allowing employees to choose how much of their salary to receive in stock — means many employees focus more on salary and RSU elections than on retirement plan optimization. Employees should review their specific plan terms in the Netflix benefits portal.

Google (Alphabet)

Google is known for offering one of the most generous 401(k) matches in the industry. Alphabet matches 50% of employee contributions up to the IRS annual limit, meaning they will match up to 50% of $24,500 — a potential employer contribution of $12,250 per year just from the match formula. Vesting on matching contributions is immediate. Google's plan supports a wide range of funds including low-cost index funds, and the plan supports after-tax contributions for Mega Backdoor Roth purposes. For Google engineers maximizing their compensation, the 401(k) match is one of the easiest guaranteed returns available.

Nvidia

Nvidia matches dollar-for-dollar on the first $6,000 contributed each year, then 50 cents on the dollar for the next $11,000, for a maximum employer match of $11,500 per year. Matching contributions vest immediately. Nvidia's equity compensation is dominated by RSUs, which have appreciated dramatically in recent years — making 401(k) optimization a meaningful strategy for employees looking to diversify into tax-advantaged accounts. Nvidia's plan also supports after-tax contributions in the plan design.

Uber

Uber offers a 100% match on the first 3% of eligible compensation, vesting immediately. The plan is administered through Fidelity and includes a standard lineup of low-cost index funds. For Uber employees who receive RSUs as a significant component of their compensation, maximizing the 401(k) match before pursuing other savings vehicles is a straightforward first step. Uber's plan supports both pre-tax and Roth contribution elections.

Adobe

Adobe matches 100% of the first 6% of eligible compensation, vesting immediately. This is a strong dollar-for-dollar match at the full 6% level, comparable to Apple. Adobe's plan is administered through Vanguard and includes low-cost institutional funds. Adobe employees should note that the immediate full vesting makes the match an unconditional benefit from day one — unlike plans with multi-year vesting schedules, there is no penalty for leaving Adobe after a short tenure in terms of forfeited match.

Robinhood

Robinhood offers a 3% employer contribution to employee 401(k) accounts — structured as a non-elective contribution (meaning it is paid regardless of whether the employee contributes). This is an unusual structure compared to a traditional matching formula, and it benefits employees at all contribution levels. Vesting terms apply — employees should review the current vesting schedule in Robinhood's plan documents. As a company with a younger workforce and equity-heavy compensation, Robinhood's 401(k) plan is particularly relevant for employees thinking about long-term wealth building beyond volatile RSU grants.

Key 401(k) Planning Considerations

• Always capture the full match first: Employer matching contributions are an immediate 50–100% return on your money. No investment can reliably beat that. Contribute at least enough to capture the full match before directing money elsewhere.
• Pre-tax vs. Roth decision: In general, contribute pre-tax when you expect your tax rate to be lower in retirement; contribute Roth when you expect it to be the same or higher. Many financial planners recommend diversifying across both to hedge future tax uncertainty.
• Mega Backdoor Roth if available: If your plan allows after-tax contributions and in-plan conversions, maximizing this strategy can add tens of thousands of dollars per year to your Roth balance — a powerful advantage over the standard limit.
• Understand your vesting schedule before leaving: If you have unvested employer contributions, your departure date relative to the vesting cliff can cost you thousands of dollars. Model this before accepting a new offer.
• State taxes matter at distribution: If you plan to retire in a different state than where you work, the state's treatment of retirement distributions is an important factor in the pre-tax vs. Roth decision today.