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Lesson P201.2 · Personal Finance 201: Build Wealth

Retirement at work: 401(k)s and the match

5-minute read · Figures for tax year 2026

An older couple in winter jackets walks along a wooded path

Photo: Oliver Morgan Media / Pexels, Pexels License

The short answer

Yes, once your consumer debt is gone and your emergency fund is full. Dave Ramsey's Baby Step 4 is investing 15% of household income for retirement, and a 401(k) at work is the usual place to start, especially when your employer matches. Respected teachers differ on keeping the match while you're still paying off debt. Whichever path you take, don't cash it out early: taxes and usually a 10% additional tax take a big bite.

How a 401(k) works

A 401(k) is a retirement account you get through your job. You choose a percentage of pay, it comes out of each check before you see it, and it's invested in funds you pick from the plan's list.

Pre-tax (traditional)Roth 401(k)
Going inBefore tax, so your taxable pay drops nowAfter tax
Coming out in retirementTaxed as incomeTax-free if you meet the rules (generally age 59½ and 5 years in the account)

For 2026 you can put in up to $24,500. At 50 or older you can add $8,000 more; at ages 60–63 the extra is $11,250 instead. Not every plan offers a Roth option, so ask.

The match and vesting

A match is money your employer adds when you contribute. It's part of your pay, and each plan sets its own formula.

Example (made-up numbers): Andre earns $50,000. His plan matches 50 cents per dollar on the first 6% of pay. If he puts in 6% ($3,000), his employer adds $1,500. At 3%, the match is $750.

Vesting decides when the employer's money is yours to keep. Money you put in from your own check is always 100% yours. The employer's part can vest over time under your plan's schedule. The IRS gives two examples: all of it after 3 years of service, or 20% more each year from year 2 to year 6. Leave before you're vested and you can lose the part that isn't. If you're laid off every winter, ask how your plan counts years of service.

When to start and how much

Baby Step 4 comes after the debt is gone and 3–6 months of expenses is saved: invest 15% of household income for retirement.

Automatic beats willpower. In a well-known study, automatic enrollment lifted 401(k) participation from 37% to 86%. In another, workers who agreed ahead of time to save part of each future pay increase saw average saving rates go from 3.5% to 13.6% over 40 months. If your plan offers automatic step-ups, turn them on.

Leaving a job, or needing cash

  • Cashing out before 59½ usually means income tax plus a 10% additional tax, unless an exception applies. Example (made-up numbers): cash out $8,000 at age 26 in the 12% bracket, and about $960 goes to federal income tax and $800 to the additional tax. That's $1,760 gone before any state tax, and the rest is no longer growing for retirement.
  • Rolling over keeps it working. Ask the old plan for a direct rollover to your new plan or an IRA; no tax is held back. If the plan pays you instead, it must hold back 20% for taxes, and you have 60 days to deposit the money in an IRA or plan. To roll over the full amount, you'd have to make up that 20% from other money.
  • 401(k) loans are usually repaid out of your paycheck. Leave the job before one is repaid and the unpaid balance can be treated as a withdrawal and taxed. Never borrow from retirement to pay consumer debt.

Different approaches

Where respected teachers differ

Everyone agrees: get high-interest debt gone before you invest. They differ on the match. Dave Ramsey's plan pauses all investing, even an employer match, until consumer debt is paid off and 3–6 months is saved, so the focus gets you out fast; then you restart with the match. Caleb Hammer encourages taking an employer match once your emergency fund is built and high-interest debt is gone. Run the match calculator with your own numbers, then pick a path and stick with it.

Your Move

Do this week

  1. Find your plan's match formula and vesting schedule in the plan summary or benefits website, or ask HR.
  2. Check what you put in now and whether it goes in pre-tax or Roth.
  3. Run the match calculator with your own numbers.
  4. Set your contribution for the path you chose, and turn on automatic step-ups if your plan has them.

Log it: 401(k) contribution set.

Common questions

Should I put money in my 401(k) while I'm paying off debt?

Respected teachers differ on the match during debt payoff; see the box above. Everyone agrees on getting high-interest debt gone first.

What happens to my match if I quit?

Your own contributions are always yours. The employer's part follows your vesting schedule, and any part that isn't vested can be lost when you leave.

Can I take money out of my 401(k) early?

Check your plan's rules. Money taken out before 59½ generally owes income tax plus a 10% additional tax unless an exception applies. A direct rollover when you change jobs avoids both.

Watch out for

  • Cashing out a small balance when you change jobs. It feels harmless, but the taxes and the lost growth add up.
  • Old accounts left at past employers. Keep a list with each plan's name and phone number, or roll them into one place.
  • A 401(k) loan for a want or for consumer debt.

Free help

Free practice

Lesson check

5 questions on this lesson, one at a time, with the answer and the reason after each. Pass with 4 right, including every must-know question.

This is general education, not tax, legal, investment or insurance advice. Rules change and every situation is different. Check the sources below, and talk to a qualified professional before you act on it.

Sources

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