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Query:

Response:

Calculated Shard: 97 (from laksa013)

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Query:

curl -X POST \
  'http://laksa097.int.ahrefs:8124/' \
  -H 'Content-Type: text/plain' \
  -H 'X-ClickHouse-Database: crawler3' \
  -H 'Authorization: Basic YXBpOg==' \
  -d 'SELECT getAhrefsURLFromUnparsed(src_unparsed) AS found_url, ifNull(toUnixTimestamp(download_stamp), 0) AS crawl_time, ifNull(toUnixTimestamp(props_url_first_seen), 0) AS first_indexed_time, download_http_code AS http_code, src_unparsed AS src_unparsed, src_root_hash AS src_root_hash, history_drop_reason AS history_drop_reason, meta_title AS meta_title, meta_descriptions AS meta_descriptions, attrs_boilerpipe_text AS attrs_boilerpipe_text, attrs_markdown AS attrs_markdown, attrs_readable_markdown AS attrs_readable_markdown, meta_canonical AS meta_canonical FROM crawler3.page_info_local FINAL PREWHERE (src_root_hash, src_unparsed) IN ((getAhrefsRootHashFromUnparsed(getAhrefsUnparsedNoserviceFromURL(\'https://www.paycom.com/resources/blog/what-is-401k-and-how-does-it-work/\')), getAhrefsUnparsedNoserviceFromURL(\'https://www.paycom.com/resources/blog/what-is-401k-and-how-does-it-work/\'))) FORMAT JSONEachRow'

Response:

{"found_url":"https:\/\/www.paycom.com\/resources\/blog\/what-is-401k-and-how-does-it-work\/","crawl_time":1768535198,"first_indexed_time":1734043730,"http_code":200,"src_unparsed":"com,paycom!www,\/resources\/blog\/what-is-401k-and-how-does-it-work\/ s443","src_root_hash":"14588639799953442097","history_drop_reason":null,"meta_title":"What Is a 401(k)? | 401(k) Contribution Limits (2024 & 2025) | Paycom Blog","meta_descriptions":["A 401(k) plan is a workplace retirement plan for employees. Here’s everything to know about the 401(k) plan in 2024 and for 2025."],"attrs_boilerpipe_text":"Life adds up. Long-term financial health has been reframed by\neconomic uncertainty\nand a stock market dip that caused\n401(k) participants to lose $1.4 trillion\nfrom late 2021 to mid-2022.\nBut, as HR professionals like you know, businesses aren’t giving up on their employees’ financial future. A staggering 82% of employers told the\nSociety for Human Resource Management\nthey rank retirement planning as one of the most important benefits organizations can offer. In fact, 94% of companies offer 401(k) retirement plans and over half auto-enroll new hires into 401(k) plans.\nPlus, greater financial wellness is a multigenerational concern. In a report from Deloitte, 43% of millennials and 47% of Generation Z cited their financial future as a major stressor. HR pros should expect a fresh wave of frequently asked questions surrounding 401(k) retirement plans and other financial matters.\nTry not to look at this trend as an unreasonably tall order, but an opportunity to build trust with employees. Of course, you’ll need to be ready to answer their inquiries accurately, quickly and confidently. But don’t worry; this is our primer — packed with employees’ common questions — to help cultivate financial wellness through 401(k) plans.\nThe\nConsumer Financial Protection Bureau\nbreaks down financial well-being into four pieces:\ncontrol over daily and monthly finances\nfreedom to enjoy life\ncapacity to absorb a financial shock\na clear path toward monetary goals\nThese factors cover financial security and choice now and in the future.\nFinancial wellness\nis defined by more than an employee’s present comfort. In fact, it encapsulates one’s ability to reach their long-term goals. Generally, employees who feel financially secure are less inclined to burnout and\nmore\nlikely to stay with a company.\nA 401(k) is a tax-deferred retirement savings plan offered by an employer. It’s a contribution plan that allows participants to set aside portions of their pay without an immediate tax deduction. With a traditional 401(k) account, taxes aren’t taken until money is withdrawn.\nHow 401(k) plans work\n401(k)s let employees select their specific investments based on employer-provided options. Choices can include stock and bond mutual funds or target-date funds. Ideally, this lowers the risk of investment loss as participants near retirement.\nBeyond the advantage of deferred taxes, 401(k)s normalize retirement planning for employees. They can think of 401(k) as a passive form of financial readiness. After deciding to contribute, employees don’t need to keep up with the contribution on a monthly basis.\nInstead, they have the luxury of adjusting their investment when they see fit. They might pivot when contribution limits change or a new investment opportunity presents itself.\nFull-time employees\nFull-time employees earning annual salaries are eligible to receive 401(k) benefits if their company provides them.\nPart-time employees\nIn 2024,\nlong-term, part-time (LTPT) employees\nwho complete at least 500 hours of service over three consecutive years are eligible to contribute to their 401(k) plan. In 2025, the eligibility requirement will decrease to two consecutive years.\nSelf-employed\nSelf-employed people can establish a\nsimplified employee pension (SEP) or contribute to a solo 401(k) plan\n, which lets participants contribute as both an employer and employee.\nEmployers\nEmployers can reduce their tax liability by contributing to their employees’ 401(k) accounts.\nEmployees who are over 21 and have worked for your company for over a year must be offered\na qualified retirement plan\n. A traditional 401(k) may require two years of service to receive an employer contribution\nif\nthe plan specifies the participant is 100% vested in all plan account balances during their first two years.\nRegardless, the plan\nmust\nlet employees make elective deferral contributions after a year of service.\nContribution limits generally rise each year; consider providing 401(k) news during benefits enrollment or shortly after compensation reviews.\n2024 401(k) contribution limit\nFor 2024, employees may contribute up to\n$23,000 annually\n.\n2025 401(k) contribution limit\nFor 2025, employees may contribute up to\n$23,500 annually\n.\nEmployees over 50 have the option to make “catch-up contributions.”\n401(k) catch-up change in 2024\nEmployees age 50 and older are eligible for an additional $7,500 in\ncatch-up contributions\n.\n401(k) catch-up change in 2025\nEmployees age 50 to 59 or 64 and older are eligible for an additional $7,500 in catch-up contributions. Employees age 60 to 63 are eligible for an additional $11,250.\nTaxes vary between a traditional 401(k) and a Roth 401(k) and depend on when funds are withdrawn.\nPretax contributions\nPretax dollars are used to make contributions, meaning taxes are paid when the money is taken out.\nPosttax contributions\nPosttax contributions are made with money that has already been taxed. These contributions grow tax-free and are tax- and penalty-free when withdrawn.\nWhere to report 401(k) contributions on Form W2\nGenerally, elective deferrals under a section 401(k) cash or deferred arrangement plan, including a SIMPLE 401(k) arrangement, can be reported in Box 12 of Form W-2 and identified as such with Code D.\nEmployees can think of a 401(k) as a savings account with four ways to grow. In most cases, 401(k)s appreciate from:\nemployee contributions\nemployers’ matching contributions\nthe specific funds a 401(k) invests in\ncompounding interest the 401(k) earns\nMany of these factors rely on a set formula, making 401(k) growth a bit easier to predict. The performance of specific funds, however, can significantly alter the plan’s compounding growth.\nIn this webinar, learn how addressing the shifting needs of your workforce can aid in recruiting, engagement and retention.\nBeyond the normal taxes associated with both 401(k) plans, any plan distribution before an employee turns 65 (or sooner with some plans) may result in an additional\nincome tax of 10%\nof the withdrawal’s amount.\n401(k) early withdrawals\nA 401(k) withdrawal is considered early if it’s taken before a participant is 59 and a half, barring further exceptions. It’s impossible to account for everything, but championing employees’ financial well-being may help offset the impact of disaster scenarios.\nWhen retired employees turn 72, they must start receiving required minimum distributions, also known as “\nRMDs\n.” On the other hand, active employees with 401(k)s or other workplace retirement plans may wait to receive payments until they formally retire. The only exception to this rule is if the active employee owns 5% of the business sponsoring the plan.\nThe primary difference between a traditional and Roth 401(k) is when taxes are applied.\nContributions to traditional 401(k) and Roth 401(k)\nA Roth 401(k) takes contributions after an employee’s income is taxed, so there are no further deductions when money is withdrawn.\nBoth methods have advantages depending on the economic climate, tax trends and personal factors. Providing employees with financial news and insight gives them the knowledge they need to make the best decision.\nIt’s often the case that the longer someone invests in a 401(k), the higher its balance will be. According to Vanguard, an investment management company, a few decades can make a significant difference:\nAverage and Median 401(k) Balances by Age\nAge\nAverage\nMedian\n<25\n$6,264\n$1,786\n25-34\n$37,211\n$14,068\n35-44\n$97,020\n$36,117\n45-54\n$179,200\n$61,530\n55-64\n$256,244\n$89,716\n65+\n$279,997\n$87,725\nSome businesses invest in their workforce’s 401(k) accounts alongside employees. The amount contributed is left up to the employer, but most opt for either a dollar-for-dollar match (up to a certain percentage) or a partial deposit.\nBoth options are attractive to employees. Needless to say, most will favor a higher, matching contribution.\nWhat happens to my 401(k) if I quit or change jobs?\nCertain 401(k) balances are transferable. If the employee moves into an independent venture, an individual retirement account (IRA) could provide the option they need to continue safely saving for the future. However, it’s a good idea to consider how IRAs differ from 401(k)s before investing.\nIf a participant passes away, benefits they would have received usually are paid to a\ndesignated beneficiary\n.\nBeneficiaries of 401(k) accounts\nEmployees can name anyone as a beneficiary, including family members, close friends or even a charitable organization. How these benefits are delivered, such as through an annuity or lump sum, is defined by the terms of the specific 401(k) plan.\nBorrowing from a 401(k) plan may be an option, but there are a few key considerations to keep in mind.\n401(k) loan limits\nAccording to the\nIRS\n, the maximum amount an employee may borrow is 50% of their vested account balance or $50,000, whichever is less. If 50% of the vested balance is less than $10,000, the employee may borrow up to $10,000.\nDrawbacks of taking out a 401(k) loan\nEmployees who don’t repay the loan, including interest, according to the loan’s terms, may face consequences. Any unpaid amounts become a plan distribution to the employee.\nIn some cases, the plan may require immediate repayment in full if an employee leaves their job. Additionally, a 10% tax penalty may be applied to the taxable distribution amount, unless the employee is at least 59 and a half years old or meets another exception.\nIt’s also worth noting that unpaid loan amounts can have a lasting impact on an employee’s retirement savings. This is something to consider when educating employees on the potential risks and consequences of borrowing from their 401(k) plan.\nCan 401(k) assets be used as collateral for a loan?\nNo, the IRS prohibits 401(k) funds from being used as collateral for a loan.\nWhile they’re not too different in theory, a\n403(b)\n— or a “tax-sheltered annuity plan” — is offered by public schools and certain 501(c)(3) tax-exempt organizations.\n401(k)s are designed for employees. IRAs, on the other hand, are available to anyone, such as independent contractors and small business owners. Although both offer similar tax advantages, IRAs have a lower contribution limit.\n2025’s limit for a traditional IRA is\n$7,000\nor $8,000 for people over the age of 50. IRAs also have wider investment opportunities; even nonearning spouses can contribute to them.\nHow does HR support my financial future?\nNone of us can control the future. Instead, we anticipate and prepare for it. This is the essence of a solid\nfinancial wellness strategy\n. Helping employees be proactive is more effective — and sincere — than a guarantee.\nPromoting programs for practical saving and retirement strategies gives employees a greater lease on their future. These can include money management classes, an on-site financial adviser or just helpful resources included in regular HR communication.\nAs employees approach retirement, they’ll start to form a picture of what it’ll look like. Without proper preparation, this period could spur stress. HR professionals like you can ease this transition by promoting responsible habits and incorporating financial wellness into company culture.\nAfter all, supporting employees’ financial well-being and helping them prepare for retirement shows that an organization cares about\ntheir\nfuture, not just its own. Remind employees to consult a licensed financial professional for in-depth investment advice.\nHow can I calculate the best amount to contribute?\nThe amount depends on your individual financial goals and situation. A general rule of thumb is to contribute enough to take full advantage of any employer match.\nCan I contribute to both 401(k) and IRA at the same time?\nYes. However, the deductibility of your IRA contributions may be limited or phased out depending on your income level and whether you or your spouse are covered by a workplace retirement plan.\nCan I change my 401(k) investment choices?\nThe frequency at which you can make changes varies by plan, but most plans allow you to make them quarterly.\nCan I choose to automatically increase my contributions?\nMany 401(k) plans offer an automatic escalation feature, which allows you to increase your contributions by a fixed percentage or dollar amount at regular intervals.\nCan I roll over my 401(k) funds into an IRA?\nYou can roll over your 401(k) funds into an IRA when you leave your job or reach age 59 and a half. This can be done directly, without having to take possession of the funds, to avoid any potential taxes or penalties.\nCan 401(k) be converted to a Roth IRA?\nYou can convert your 401(k) funds to a Roth IRA, but this will require you to pay income taxes on the converted amount.\nWhere can I check my 401(k) balance?\nYou can typically check your 401(k) balance through your employer’s HR portal, the plan administrator’s website or by contacting the plan administrator directly.\nHow do I withdraw from my 401(k)?\nWithdrawing from your 401(k) before age 59 and a half may result in a 10% penalty, in addition to income taxes on the withdrawn amount. You can withdraw from your 401(k) by contacting the plan administrator or through an online portal.\nWhy would a 401(k) be frozen?\nA 401(k) plan may be frozen due to various reasons, such as a change in plan administrators, a merger or acquisition, or a plan amendment. During this time, you may not be able to make changes to your account or take withdrawals.\nAre 401(k) plans FDIC insured?\n401(k) plans are not FDIC insured.\nDoes the 60-day rollover rule apply to my 401(k)?\nIf you take a distribution from your 401(k) and do not roll it over into another qualified plan or IRA within 60 days, you may be subject to income taxes and penalties.\nCan my 401(k) be garnished?\nYour 401(k) account can be garnished, but only in certain circumstances, such as to satisfy a qualified domestic relations order (QDRO) or to pay taxes owed.\nShould my 401(k) be deducted from severance pay?\nTypically, 401(k) contributions are not deducted from severance pay, as severance pay is not considered regular compensation.\nShould my 401(k) be deducted from bonus checks?\nIt depends on your employer’s plan and the type of bonus. Some plans may allow 401(k) contributions to be deducted from bonus checks, while others may not.\nWhat is a forced distribution?\nA forced distribution occurs when a plan participant is required to take a distribution from their 401(k) account, usually due to a plan amendment or termination.\nHow does a 401(k) work when you retire?\nWhen you retire, you can typically take distributions from your 401(k) account, which may be subject to income taxes. You may also be able to roll over your 401(k) funds into an IRA or take a lump-sum distribution.\nDo 401(k) plans have beneficiaries?\n401(k) plans allow you to designate beneficiaries who will receive the account balance in the event of your passing.\nDoes a 401(k) beneficiary pay taxes?\nThe beneficiary will be required to pay income taxes on the distribution they receive.\nCan a 401(k) be put in a trust?\nYou can name a trust as the beneficiary of your 401(k) account, which can provide additional protection and control over the distribution of your assets.\nCan a 401(k) be inherited?\nYour 401(k) account can be inherited by your designated beneficiary.\nToday’s workforce wants more than just a 401(k) plan. Learn how to create a\nbenefits package\nthat meets the changing needs of the modern employee and sets your organization apart from the competition.\nAnd check out how Paycom’s\n401(k) Reporting tool\neases and automates retirement plan management for employers.\nDISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. 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But with a wave of Generation Z and millennial workers concerned about their financial future, it’s important to prepare for any question they ask. Read in-depth answers to many of the most common questions around 401(k)s.\n\nLife adds up. Long-term financial health has been reframed by [economic uncertainty](https:\/\/www.paycom.com\/resources\/blog\/how-hr-tech-can-support-businesses-to-weather-economic-uncertainty\/) and a stock market dip that caused [401(k) participants to lose \\$1.4 trillion](https:\/\/www.cbsnews.com\/news\/stocks-drop-recession-retirement-savings-401k-ira-3-trillion-2022\/) from late 2021 to mid-2022.\n\nBut, as HR professionals like you know, businesses aren’t giving up on their employees’ financial future. A staggering 82% of employers told the [Society for Human Resource Management](https:\/\/www.shrm.org\/about-shrm\/press-room\/press-releases\/pages\/shrm-releases-2022-employee-benefits-survey--healthcare-retirement-savings-and-leave-benefits-emerge-as-the-top-ranked-be.aspx) they rank retirement planning as one of the most important benefits organizations can offer. In fact, 94% of companies offer 401(k) retirement plans and over half auto-enroll new hires into 401(k) plans.\n\nPlus, greater financial wellness is a multigenerational concern. In a report from Deloitte, 43% of millennials and 47% of Generation Z cited their financial future as a major stressor. HR pros should expect a fresh wave of frequently asked questions surrounding 401(k) retirement plans and other financial matters.\n\nTry not to look at this trend as an unreasonably tall order, but an opportunity to build trust with employees. Of course, you’ll need to be ready to answer their inquiries accurately, quickly and confidently. But don’t worry; this is our primer — packed with employees’ common questions — to help cultivate financial wellness through 401(k) plans.\n\n## What is financial well-being?\nThe [Consumer Financial Protection Bureau](https:\/\/files.consumerfinance.gov\/f\/201501_cfpb_report_financial-well-being.pdf) breaks down financial well-being into four pieces:\n\n- control over daily and monthly finances\n- freedom to enjoy life\n- capacity to absorb a financial shock\n- a clear path toward monetary goals\n\nThese factors cover financial security and choice now and in the future. [Financial wellness](https:\/\/www.paycom.com\/resources\/blog\/how-eaps-help-employees-financially\/) is defined by more than an employee’s present comfort. In fact, it encapsulates one’s ability to reach their long-term goals. Generally, employees who feel financially secure are less inclined to burnout and *more* likely to stay with a company.\n\n## What is a 401(k)?\nA 401(k) is a tax-deferred retirement savings plan offered by an employer. It’s a contribution plan that allows participants to set aside portions of their pay without an immediate tax deduction. With a traditional 401(k) account, taxes aren’t taken until money is withdrawn.\n\n## How 401(k) plans work\n401(k)s let employees select their specific investments based on employer-provided options. Choices can include stock and bond mutual funds or target-date funds. Ideally, this lowers the risk of investment loss as participants near retirement.\n\n## Benefits of a 401(k)\nBeyond the advantage of deferred taxes, 401(k)s normalize retirement planning for employees. They can think of 401(k) as a passive form of financial readiness. After deciding to contribute, employees don’t need to keep up with the contribution on a monthly basis.\n\nInstead, they have the luxury of adjusting their investment when they see fit. They might pivot when contribution limits change or a new investment opportunity presents itself.\n\n### *Full-time employees*\nFull-time employees earning annual salaries are eligible to receive 401(k) benefits if their company provides them.\n\n### *Part-time employees*\nIn 2024, [long-term, part-time (LTPT) employees](https:\/\/www.irs.gov\/newsroom\/treasury-and-irs-issue-guidance-on-long-term-part-time-employees-in-403b-retirement-plans-and-announce-delayed-applicability-date-for-related-final-401k-regulation) who complete at least 500 hours of service over three consecutive years are eligible to contribute to their 401(k) plan. In 2025, the eligibility requirement will decrease to two consecutive years.\n\n### *Self-employed*\nSelf-employed people can establish a [simplified employee pension (SEP) or contribute to a solo 401(k) plan](https:\/\/www.irs.gov\/retirement-plans\/retirement-plans-for-self-employed-people), which lets participants contribute as both an employer and employee.\n\n### *Employers*\nEmployers can reduce their tax liability by contributing to their employees’ 401(k) accounts.\n\n## Eligibility requirements for a 401(k) plan\nEmployees who are over 21 and have worked for your company for over a year must be offered [a qualified retirement plan](https:\/\/www.irs.gov\/retirement-plans\/plan-sponsor\/401k-plan-qualification-requirements#:~:text=Employee%20participation%20standards%20must%20be%20met&text=\$A%20traditional%20401\\(k\$,in%20all%20plan%20account%20balances). A traditional 401(k) may require two years of service to receive an employer contribution *if* the plan specifies the participant is 100% vested in all plan account balances during their first two years.\n\nRegardless, the plan *must* let employees make elective deferral contributions after a year of service.\n\n## 401(k) contribution limits\nContribution limits generally rise each year; consider providing 401(k) news during benefits enrollment or shortly after compensation reviews.\n\n### *2024 401(k) contribution limit*\nFor 2024, employees may contribute up to [\\$23,000 annually](https:\/\/www.irs.gov\/newsroom\/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000).\n\n### *2025 401(k) contribution limit*\nFor 2025, employees may contribute up to [\\$23,500 annually](https:\/\/www.irs.gov\/newsroom\/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000).\n\n## 401(k) catch-up changes\nEmployees over 50 have the option to make “catch-up contributions.”\n\n### *401(k) catch-up change in 2024*\nEmployees age 50 and older are eligible for an additional \\$7,500 in [catch-up contributions](https:\/\/www.irs.gov\/retirement-plans\/plan-participant-employee\/retirement-topics-401k-and-profit-sharing-plan-contribution-limits).\n\n### *401(k) catch-up change in 2025*\nEmployees age 50 to 59 or 64 and older are eligible for an additional \\$7,500 in catch-up contributions. Employees age 60 to 63 are eligible for an additional \\$11,250.\n\n## Tax implications of 401(k)\nTaxes vary between a traditional 401(k) and a Roth 401(k) and depend on when funds are withdrawn.\n\n### *Pretax contributions*\nPretax dollars are used to make contributions, meaning taxes are paid when the money is taken out.\n\n### *Posttax contributions*\nPosttax contributions are made with money that has already been taxed. These contributions grow tax-free and are tax- and penalty-free when withdrawn.\n\n## Where to report 401(k) contributions on Form W2\nGenerally, elective deferrals under a section 401(k) cash or deferred arrangement plan, including a SIMPLE 401(k) arrangement, can be reported in Box 12 of Form W-2 and identified as such with Code D.\n\n## How 401(k) accounts earn money\nEmployees can think of a 401(k) as a savings account with four ways to grow. In most cases, 401(k)s appreciate from:\n\n- employee contributions\n- employers’ matching contributions\n- the specific funds a 401(k) invests in\n- compounding interest the 401(k) earns\n\nMany of these factors rely on a set formula, making 401(k) growth a bit easier to predict. The performance of specific funds, however, can significantly alter the plan’s compounding growth.\n\nIn this webinar, learn how addressing the shifting needs of your workforce can aid in recruiting, engagement and retention.\n\n[Watch Webinar](https:\/\/www.paycom.com\/resources\/blog\/what-is-401k-and-how-does-it-work\/)\n## 401(k) withdrawal rules\nBeyond the normal taxes associated with both 401(k) plans, any plan distribution before an employee turns 65 (or sooner with some plans) may result in an additional [income tax of 10%](https:\/\/www.irs.gov\/retirement-plans\/hardships-early-withdrawals-and-loans) of the withdrawal’s amount.\n\n### *401(k) early withdrawals*\nA 401(k) withdrawal is considered early if it’s taken before a participant is 59 and a half, barring further exceptions. It’s impossible to account for everything, but championing employees’ financial well-being may help offset the impact of disaster scenarios.\n\n## 401(k) required minimum distributions (RMDs)\nWhen retired employees turn 72, they must start receiving required minimum distributions, also known as “[RMDs](https:\/\/www.irs.gov\/retirement-plans\/retirement-plan-and-ira-required-minimum-distributions-faqs).” On the other hand, active employees with 401(k)s or other workplace retirement plans may wait to receive payments until they formally retire. The only exception to this rule is if the active employee owns 5% of the business sponsoring the plan.\n\n## Traditional 401(k) vs. Roth 401(k)\nThe primary difference between a traditional and Roth 401(k) is when taxes are applied.\n\n### *Contributions to traditional 401(k) and Roth 401(k)*\nA Roth 401(k) takes contributions after an employee’s income is taxed, so there are no further deductions when money is withdrawn.\n\nBoth methods have advantages depending on the economic climate, tax trends and personal factors. Providing employees with financial news and insight gives them the knowledge they need to make the best decision.\n\n## Average 401(k) balances by age\nIt’s often the case that the longer someone invests in a 401(k), the higher its balance will be. According to Vanguard, an investment management company, a few decades can make a significant difference:\n\n| **Average and Median 401(k) Balances by Age** |   |   |\n|---|---|---|\n| **Age** | **Average** | **Median** |\n| \\<25 | \\$6,264 | \\$1,786 |\n| 25-34 | \\$37,211 | \\$14,068 |\n| 35-44 | \\$97,020 | \\$36,117 |\n| 45-54 | \\$179,200 | \\$61,530 |\n| 55-64 | \\$256,244 | \\$89,716 |\n| 65+ | \\$279,997 | \\$87,725 |\n## 401(k) company match\nSome businesses invest in their workforce’s 401(k) accounts alongside employees. The amount contributed is left up to the employer, but most opt for either a dollar-for-dollar match (up to a certain percentage) or a partial deposit.\n\nBoth options are attractive to employees. Needless to say, most will favor a higher, matching contribution.\n\n## What happens to my 401(k) if I quit or change jobs?\nCertain 401(k) balances are transferable. If the employee moves into an independent venture, an individual retirement account (IRA) could provide the option they need to continue safely saving for the future. However, it’s a good idea to consider how IRAs differ from 401(k)s before investing.\n\n## What happens to my 401(k) if I die?\nIf a participant passes away, benefits they would have received usually are paid to a [designated beneficiary](https:\/\/www.irs.gov\/retirement-plans\/plan-participant-employee\/retirement-topics-death).\n\n### *Beneficiaries of 401(k) accounts*\nEmployees can name anyone as a beneficiary, including family members, close friends or even a charitable organization. How these benefits are delivered, such as through an annuity or lump sum, is defined by the terms of the specific 401(k) plan.\n\n## 401(k) loans\nBorrowing from a 401(k) plan may be an option, but there are a few key considerations to keep in mind.\n\n### *401(k) loan limits*\nAccording to the [IRS](https:\/\/www.irs.gov\/retirement-plans\/plan-participant-employee\/retirement-topics-loans#:~:text=Maximum%20loan%20amount,may%20borrow%20up%20to%20%2410%2C000), the maximum amount an employee may borrow is 50% of their vested account balance or \\$50,000, whichever is less. If 50% of the vested balance is less than \\$10,000, the employee may borrow up to \\$10,000.\n\n### *Drawbacks of taking out a 401(k) loan*\nEmployees who don’t repay the loan, including interest, according to the loan’s terms, may face consequences. Any unpaid amounts become a plan distribution to the employee.\n\nIn some cases, the plan may require immediate repayment in full if an employee leaves their job. Additionally, a 10% tax penalty may be applied to the taxable distribution amount, unless the employee is at least 59 and a half years old or meets another exception.\n\nIt’s also worth noting that unpaid loan amounts can have a lasting impact on an employee’s retirement savings. This is something to consider when educating employees on the potential risks and consequences of borrowing from their 401(k) plan.\n\n## Can 401(k) assets be used as collateral for a loan?\nNo, the IRS prohibits 401(k) funds from being used as collateral for a loan.\n\n## 401(k) vs. 403(b)\nWhile they’re not too different in theory, a [403(b)](https:\/\/www.irs.gov\/retirement-plans\/retirement-plans-faqs-regarding-403b-tax-sheltered-annuity-plans) — or a “tax-sheltered annuity plan” — is offered by public schools and certain 501(c)(3) tax-exempt organizations.\n\n## 401(k) vs. IRA\n401(k)s are designed for employees. IRAs, on the other hand, are available to anyone, such as independent contractors and small business owners. Although both offer similar tax advantages, IRAs have a lower contribution limit.\n\n2025’s limit for a traditional IRA is [\\$7,000](https:\/\/www.irs.gov\/newsroom\/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000) or \\$8,000 for people over the age of 50. IRAs also have wider investment opportunities; even nonearning spouses can contribute to them.\n\n## How does HR support my financial future?\nNone of us can control the future. Instead, we anticipate and prepare for it. This is the essence of a solid [financial wellness strategy](https:\/\/www.paycom.com\/resources\/blog\/how-financial-literacy-helps-with-employee-retention\/). Helping employees be proactive is more effective — and sincere — than a guarantee.\n\nPromoting programs for practical saving and retirement strategies gives employees a greater lease on their future. These can include money management classes, an on-site financial adviser or just helpful resources included in regular HR communication.\n\nAs employees approach retirement, they’ll start to form a picture of what it’ll look like. Without proper preparation, this period could spur stress. HR professionals like you can ease this transition by promoting responsible habits and incorporating financial wellness into company culture.\n\nAfter all, supporting employees’ financial well-being and helping them prepare for retirement shows that an organization cares about *their* future, not just its own. Remind employees to consult a licensed financial professional for in-depth investment advice.\n\n## FAQ\n### *How can I calculate the best amount to contribute?*\nThe amount depends on your individual financial goals and situation. A general rule of thumb is to contribute enough to take full advantage of any employer match.\n\n### *Can I contribute to both 401(k) and IRA at the same time?*\nYes. However, the deductibility of your IRA contributions may be limited or phased out depending on your income level and whether you or your spouse are covered by a workplace retirement plan.\n\n### *Can I change my 401(k) investment choices?*\nThe frequency at which you can make changes varies by plan, but most plans allow you to make them quarterly.\n\n### *Can I choose to automatically increase my contributions?*\nMany 401(k) plans offer an automatic escalation feature, which allows you to increase your contributions by a fixed percentage or dollar amount at regular intervals.\n\n### *Can I roll over my 401(k) funds into an IRA?*\nYou can roll over your 401(k) funds into an IRA when you leave your job or reach age 59 and a half. This can be done directly, without having to take possession of the funds, to avoid any potential taxes or penalties.\n\n### *Can 401(k) be converted to a Roth IRA?*\nYou can convert your 401(k) funds to a Roth IRA, but this will require you to pay income taxes on the converted amount.\n\n### *Where can I check my 401(k) balance?*\nYou can typically check your 401(k) balance through your employer’s HR portal, the plan administrator’s website or by contacting the plan administrator directly.\n\n### *How do I withdraw from my 401(k)?*\nWithdrawing from your 401(k) before age 59 and a half may result in a 10% penalty, in addition to income taxes on the withdrawn amount. You can withdraw from your 401(k) by contacting the plan administrator or through an online portal.\n\n### *Why would a 401(k) be frozen?*\nA 401(k) plan may be frozen due to various reasons, such as a change in plan administrators, a merger or acquisition, or a plan amendment. During this time, you may not be able to make changes to your account or take withdrawals.\n\n### *Are 401(k) plans FDIC insured?*\n401(k) plans are not FDIC insured.\n\n### *Does the 60-day rollover rule apply to my 401(k)?*\nIf you take a distribution from your 401(k) and do not roll it over into another qualified plan or IRA within 60 days, you may be subject to income taxes and penalties.\n\n### *Can my 401(k) be garnished?*\nYour 401(k) account can be garnished, but only in certain circumstances, such as to satisfy a qualified domestic relations order (QDRO) or to pay taxes owed.\n\n### *Should my 401(k) be deducted from severance pay?*\nTypically, 401(k) contributions are not deducted from severance pay, as severance pay is not considered regular compensation.\n\n### *Should my 401(k) be deducted from bonus checks?*\nIt depends on your employer’s plan and the type of bonus. Some plans may allow 401(k) contributions to be deducted from bonus checks, while others may not.\n\n### *What is a forced distribution?*\nA forced distribution occurs when a plan participant is required to take a distribution from their 401(k) account, usually due to a plan amendment or termination.\n\n### *How does a 401(k) work when you retire?*\nWhen you retire, you can typically take distributions from your 401(k) account, which may be subject to income taxes. You may also be able to roll over your 401(k) funds into an IRA or take a lump-sum distribution.\n\n### *Do 401(k) plans have beneficiaries?*\n401(k) plans allow you to designate beneficiaries who will receive the account balance in the event of your passing.\n\n### *Does a 401(k) beneficiary pay taxes?*\nThe beneficiary will be required to pay income taxes on the distribution they receive.\n\n### *Can a 401(k) be put in a trust?*\nYou can name a trust as the beneficiary of your 401(k) account, which can provide additional protection and control over the distribution of your assets.\n\n### *Can a 401(k) be inherited?*\nYour 401(k) account can be inherited by your designated beneficiary.\n\nToday’s workforce wants more than just a 401(k) plan. Learn how to create a [benefits package](https:\/\/www.paycom.com\/resources\/webinars\/unique-employee-benefits-what-does-your-workforce-really-want\/) that meets the changing needs of the modern employee and sets your organization apart from the competition.\n\nAnd check out how Paycom’s [401(k) Reporting tool](https:\/\/www.paycom.com\/software\/401k-reporting\/) eases and automates retirement plan management for employers.\n\n*DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.*\n\n## Related content\n[A Guide to Open Enrollment for 2025 Blog Post A Guide to Open Enrollment for 2025 Open enrollment is the period when employees can choose benefits their employers offer, including health insurance. Read how open enrollment works for 2025. 20 Minutes to Read](https:\/\/www.paycom.com\/resources\/blog\/open-enrollment\/)\n\n[Why Employers Should Offer Financial Literacy Programs Blog Post Why Employers Should Offer Financial Literacy Programs Financial literacy is key to engaged, satisfied and dedicated employees. 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URL	https://www.paycom.com/resources/blog/what-is-401k-and-how-does-it-work/
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Meta Title	What Is a 401(k)? \| 401(k) Contribution Limits (2024 & 2025) \| Paycom Blog
Meta Description	A 401(k) plan is a workplace retirement plan for employees. Here’s everything to know about the 401(k) plan in 2024 and for 2025.
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Boilerpipe Text	Life adds up. Long-term financial health has been reframed by economic uncertainty and a stock market dip that caused 401(k) participants to lose $1.4 trillion from late 2021 to mid-2022. But, as HR professionals like you know, businesses aren’t giving up on their employees’ financial future. A staggering 82% of employers told the Society for Human Resource Management they rank retirement planning as one of the most important benefits organizations can offer. In fact, 94% of companies offer 401(k) retirement plans and over half auto-enroll new hires into 401(k) plans. Plus, greater financial wellness is a multigenerational concern. In a report from Deloitte, 43% of millennials and 47% of Generation Z cited their financial future as a major stressor. HR pros should expect a fresh wave of frequently asked questions surrounding 401(k) retirement plans and other financial matters. Try not to look at this trend as an unreasonably tall order, but an opportunity to build trust with employees. Of course, you’ll need to be ready to answer their inquiries accurately, quickly and confidently. But don’t worry; this is our primer — packed with employees’ common questions — to help cultivate financial wellness through 401(k) plans. The Consumer Financial Protection Bureau breaks down financial well-being into four pieces: control over daily and monthly finances freedom to enjoy life capacity to absorb a financial shock a clear path toward monetary goals These factors cover financial security and choice now and in the future. Financial wellness is defined by more than an employee’s present comfort. In fact, it encapsulates one’s ability to reach their long-term goals. Generally, employees who feel financially secure are less inclined to burnout and more likely to stay with a company. A 401(k) is a tax-deferred retirement savings plan offered by an employer. It’s a contribution plan that allows participants to set aside portions of their pay without an immediate tax deduction. With a traditional 401(k) account, taxes aren’t taken until money is withdrawn. How 401(k) plans work 401(k)s let employees select their specific investments based on employer-provided options. Choices can include stock and bond mutual funds or target-date funds. Ideally, this lowers the risk of investment loss as participants near retirement. Beyond the advantage of deferred taxes, 401(k)s normalize retirement planning for employees. They can think of 401(k) as a passive form of financial readiness. After deciding to contribute, employees don’t need to keep up with the contribution on a monthly basis. Instead, they have the luxury of adjusting their investment when they see fit. They might pivot when contribution limits change or a new investment opportunity presents itself. Full-time employees Full-time employees earning annual salaries are eligible to receive 401(k) benefits if their company provides them. Part-time employees In 2024, long-term, part-time (LTPT) employees who complete at least 500 hours of service over three consecutive years are eligible to contribute to their 401(k) plan. In 2025, the eligibility requirement will decrease to two consecutive years. Self-employed Self-employed people can establish a simplified employee pension (SEP) or contribute to a solo 401(k) plan , which lets participants contribute as both an employer and employee. Employers Employers can reduce their tax liability by contributing to their employees’ 401(k) accounts. Employees who are over 21 and have worked for your company for over a year must be offered a qualified retirement plan . A traditional 401(k) may require two years of service to receive an employer contribution if the plan specifies the participant is 100% vested in all plan account balances during their first two years. Regardless, the plan must let employees make elective deferral contributions after a year of service. Contribution limits generally rise each year; consider providing 401(k) news during benefits enrollment or shortly after compensation reviews. 2024 401(k) contribution limit For 2024, employees may contribute up to $23,000 annually . 2025 401(k) contribution limit For 2025, employees may contribute up to $23,500 annually . Employees over 50 have the option to make “catch-up contributions.” 401(k) catch-up change in 2024 Employees age 50 and older are eligible for an additional $7,500 in catch-up contributions . 401(k) catch-up change in 2025 Employees age 50 to 59 or 64 and older are eligible for an additional $7,500 in catch-up contributions. Employees age 60 to 63 are eligible for an additional $11,250. Taxes vary between a traditional 401(k) and a Roth 401(k) and depend on when funds are withdrawn. Pretax contributions Pretax dollars are used to make contributions, meaning taxes are paid when the money is taken out. Posttax contributions Posttax contributions are made with money that has already been taxed. These contributions grow tax-free and are tax- and penalty-free when withdrawn. Where to report 401(k) contributions on Form W2 Generally, elective deferrals under a section 401(k) cash or deferred arrangement plan, including a SIMPLE 401(k) arrangement, can be reported in Box 12 of Form W-2 and identified as such with Code D. Employees can think of a 401(k) as a savings account with four ways to grow. In most cases, 401(k)s appreciate from: employee contributions employers’ matching contributions the specific funds a 401(k) invests in compounding interest the 401(k) earns Many of these factors rely on a set formula, making 401(k) growth a bit easier to predict. The performance of specific funds, however, can significantly alter the plan’s compounding growth. In this webinar, learn how addressing the shifting needs of your workforce can aid in recruiting, engagement and retention. Beyond the normal taxes associated with both 401(k) plans, any plan distribution before an employee turns 65 (or sooner with some plans) may result in an additional income tax of 10% of the withdrawal’s amount. 401(k) early withdrawals A 401(k) withdrawal is considered early if it’s taken before a participant is 59 and a half, barring further exceptions. It’s impossible to account for everything, but championing employees’ financial well-being may help offset the impact of disaster scenarios. When retired employees turn 72, they must start receiving required minimum distributions, also known as “ RMDs .” On the other hand, active employees with 401(k)s or other workplace retirement plans may wait to receive payments until they formally retire. The only exception to this rule is if the active employee owns 5% of the business sponsoring the plan. The primary difference between a traditional and Roth 401(k) is when taxes are applied. Contributions to traditional 401(k) and Roth 401(k) A Roth 401(k) takes contributions after an employee’s income is taxed, so there are no further deductions when money is withdrawn. Both methods have advantages depending on the economic climate, tax trends and personal factors. Providing employees with financial news and insight gives them the knowledge they need to make the best decision. It’s often the case that the longer someone invests in a 401(k), the higher its balance will be. According to Vanguard, an investment management company, a few decades can make a significant difference: Average and Median 401(k) Balances by Age Age Average Median <25 $6,264 $1,786 25-34 $37,211 $14,068 35-44 $97,020 $36,117 45-54 $179,200 $61,530 55-64 $256,244 $89,716 65+ $279,997 $87,725 Some businesses invest in their workforce’s 401(k) accounts alongside employees. The amount contributed is left up to the employer, but most opt for either a dollar-for-dollar match (up to a certain percentage) or a partial deposit. Both options are attractive to employees. Needless to say, most will favor a higher, matching contribution. What happens to my 401(k) if I quit or change jobs? Certain 401(k) balances are transferable. If the employee moves into an independent venture, an individual retirement account (IRA) could provide the option they need to continue safely saving for the future. However, it’s a good idea to consider how IRAs differ from 401(k)s before investing. If a participant passes away, benefits they would have received usually are paid to a designated beneficiary . Beneficiaries of 401(k) accounts Employees can name anyone as a beneficiary, including family members, close friends or even a charitable organization. How these benefits are delivered, such as through an annuity or lump sum, is defined by the terms of the specific 401(k) plan. Borrowing from a 401(k) plan may be an option, but there are a few key considerations to keep in mind. 401(k) loan limits According to the IRS , the maximum amount an employee may borrow is 50% of their vested account balance or $50,000, whichever is less. If 50% of the vested balance is less than $10,000, the employee may borrow up to $10,000. Drawbacks of taking out a 401(k) loan Employees who don’t repay the loan, including interest, according to the loan’s terms, may face consequences. Any unpaid amounts become a plan distribution to the employee. In some cases, the plan may require immediate repayment in full if an employee leaves their job. Additionally, a 10% tax penalty may be applied to the taxable distribution amount, unless the employee is at least 59 and a half years old or meets another exception. It’s also worth noting that unpaid loan amounts can have a lasting impact on an employee’s retirement savings. This is something to consider when educating employees on the potential risks and consequences of borrowing from their 401(k) plan. Can 401(k) assets be used as collateral for a loan? No, the IRS prohibits 401(k) funds from being used as collateral for a loan. While they’re not too different in theory, a 403(b) — or a “tax-sheltered annuity plan” — is offered by public schools and certain 501(c)(3) tax-exempt organizations. 401(k)s are designed for employees. IRAs, on the other hand, are available to anyone, such as independent contractors and small business owners. Although both offer similar tax advantages, IRAs have a lower contribution limit. 2025’s limit for a traditional IRA is $7,000 or $8,000 for people over the age of 50. IRAs also have wider investment opportunities; even nonearning spouses can contribute to them. How does HR support my financial future? None of us can control the future. Instead, we anticipate and prepare for it. This is the essence of a solid financial wellness strategy . Helping employees be proactive is more effective — and sincere — than a guarantee. Promoting programs for practical saving and retirement strategies gives employees a greater lease on their future. These can include money management classes, an on-site financial adviser or just helpful resources included in regular HR communication. As employees approach retirement, they’ll start to form a picture of what it’ll look like. Without proper preparation, this period could spur stress. HR professionals like you can ease this transition by promoting responsible habits and incorporating financial wellness into company culture. After all, supporting employees’ financial well-being and helping them prepare for retirement shows that an organization cares about their future, not just its own. Remind employees to consult a licensed financial professional for in-depth investment advice. How can I calculate the best amount to contribute? The amount depends on your individual financial goals and situation. A general rule of thumb is to contribute enough to take full advantage of any employer match. Can I contribute to both 401(k) and IRA at the same time? Yes. However, the deductibility of your IRA contributions may be limited or phased out depending on your income level and whether you or your spouse are covered by a workplace retirement plan. Can I change my 401(k) investment choices? The frequency at which you can make changes varies by plan, but most plans allow you to make them quarterly. Can I choose to automatically increase my contributions? Many 401(k) plans offer an automatic escalation feature, which allows you to increase your contributions by a fixed percentage or dollar amount at regular intervals. Can I roll over my 401(k) funds into an IRA? You can roll over your 401(k) funds into an IRA when you leave your job or reach age 59 and a half. This can be done directly, without having to take possession of the funds, to avoid any potential taxes or penalties. Can 401(k) be converted to a Roth IRA? You can convert your 401(k) funds to a Roth IRA, but this will require you to pay income taxes on the converted amount. Where can I check my 401(k) balance? You can typically check your 401(k) balance through your employer’s HR portal, the plan administrator’s website or by contacting the plan administrator directly. How do I withdraw from my 401(k)? Withdrawing from your 401(k) before age 59 and a half may result in a 10% penalty, in addition to income taxes on the withdrawn amount. You can withdraw from your 401(k) by contacting the plan administrator or through an online portal. Why would a 401(k) be frozen? A 401(k) plan may be frozen due to various reasons, such as a change in plan administrators, a merger or acquisition, or a plan amendment. During this time, you may not be able to make changes to your account or take withdrawals. Are 401(k) plans FDIC insured? 401(k) plans are not FDIC insured. Does the 60-day rollover rule apply to my 401(k)? If you take a distribution from your 401(k) and do not roll it over into another qualified plan or IRA within 60 days, you may be subject to income taxes and penalties. Can my 401(k) be garnished? Your 401(k) account can be garnished, but only in certain circumstances, such as to satisfy a qualified domestic relations order (QDRO) or to pay taxes owed. Should my 401(k) be deducted from severance pay? Typically, 401(k) contributions are not deducted from severance pay, as severance pay is not considered regular compensation. Should my 401(k) be deducted from bonus checks? It depends on your employer’s plan and the type of bonus. Some plans may allow 401(k) contributions to be deducted from bonus checks, while others may not. What is a forced distribution? A forced distribution occurs when a plan participant is required to take a distribution from their 401(k) account, usually due to a plan amendment or termination. How does a 401(k) work when you retire? When you retire, you can typically take distributions from your 401(k) account, which may be subject to income taxes. You may also be able to roll over your 401(k) funds into an IRA or take a lump-sum distribution. Do 401(k) plans have beneficiaries? 401(k) plans allow you to designate beneficiaries who will receive the account balance in the event of your passing. Does a 401(k) beneficiary pay taxes? The beneficiary will be required to pay income taxes on the distribution they receive. Can a 401(k) be put in a trust? You can name a trust as the beneficiary of your 401(k) account, which can provide additional protection and control over the distribution of your assets. Can a 401(k) be inherited? Your 401(k) account can be inherited by your designated beneficiary. Today’s workforce wants more than just a 401(k) plan. Learn how to create a benefits package that meets the changing needs of the modern employee and sets your organization apart from the competition. And check out how Paycom’s 401(k) Reporting tool eases and automates retirement plan management for employers. DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.
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But with a wave of Generation Z and millennial workers concerned about their financial future, it’s important to prepare for any question they ask. Read in-depth answers to many of the most common questions around 401(k)s. Life adds up. Long-term financial health has been reframed by [economic uncertainty](https://www.paycom.com/resources/blog/how-hr-tech-can-support-businesses-to-weather-economic-uncertainty/) and a stock market dip that caused [401(k) participants to lose \$1.4 trillion](https://www.cbsnews.com/news/stocks-drop-recession-retirement-savings-401k-ira-3-trillion-2022/) from late 2021 to mid-2022. But, as HR professionals like you know, businesses aren’t giving up on their employees’ financial future. A staggering 82% of employers told the [Society for Human Resource Management](https://www.shrm.org/about-shrm/press-room/press-releases/pages/shrm-releases-2022-employee-benefits-survey--healthcare-retirement-savings-and-leave-benefits-emerge-as-the-top-ranked-be.aspx) they rank retirement planning as one of the most important benefits organizations can offer. In fact, 94% of companies offer 401(k) retirement plans and over half auto-enroll new hires into 401(k) plans. Plus, greater financial wellness is a multigenerational concern. In a report from Deloitte, 43% of millennials and 47% of Generation Z cited their financial future as a major stressor. HR pros should expect a fresh wave of frequently asked questions surrounding 401(k) retirement plans and other financial matters. Try not to look at this trend as an unreasonably tall order, but an opportunity to build trust with employees. Of course, you’ll need to be ready to answer their inquiries accurately, quickly and confidently. But don’t worry; this is our primer — packed with employees’ common questions — to help cultivate financial wellness through 401(k) plans. ## What is financial well-being? The [Consumer Financial Protection Bureau](https://files.consumerfinance.gov/f/201501_cfpb_report_financial-well-being.pdf) breaks down financial well-being into four pieces: - control over daily and monthly finances - freedom to enjoy life - capacity to absorb a financial shock - a clear path toward monetary goals These factors cover financial security and choice now and in the future. [Financial wellness](https://www.paycom.com/resources/blog/how-eaps-help-employees-financially/) is defined by more than an employee’s present comfort. In fact, it encapsulates one’s ability to reach their long-term goals. Generally, employees who feel financially secure are less inclined to burnout and more likely to stay with a company. ## What is a 401(k)? A 401(k) is a tax-deferred retirement savings plan offered by an employer. It’s a contribution plan that allows participants to set aside portions of their pay without an immediate tax deduction. With a traditional 401(k) account, taxes aren’t taken until money is withdrawn. ## How 401(k) plans work 401(k)s let employees select their specific investments based on employer-provided options. Choices can include stock and bond mutual funds or target-date funds. Ideally, this lowers the risk of investment loss as participants near retirement. ## Benefits of a 401(k) Beyond the advantage of deferred taxes, 401(k)s normalize retirement planning for employees. They can think of 401(k) as a passive form of financial readiness. After deciding to contribute, employees don’t need to keep up with the contribution on a monthly basis. Instead, they have the luxury of adjusting their investment when they see fit. They might pivot when contribution limits change or a new investment opportunity presents itself. ### Full-time employees Full-time employees earning annual salaries are eligible to receive 401(k) benefits if their company provides them. ### Part-time employees In 2024, [long-term, part-time (LTPT) employees](https://www.irs.gov/newsroom/treasury-and-irs-issue-guidance-on-long-term-part-time-employees-in-403b-retirement-plans-and-announce-delayed-applicability-date-for-related-final-401k-regulation) who complete at least 500 hours of service over three consecutive years are eligible to contribute to their 401(k) plan. In 2025, the eligibility requirement will decrease to two consecutive years. ### Self-employed Self-employed people can establish a [simplified employee pension (SEP) or contribute to a solo 401(k) plan](https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people), which lets participants contribute as both an employer and employee. ### Employers Employers can reduce their tax liability by contributing to their employees’ 401(k) accounts. ## Eligibility requirements for a 401(k) plan Employees who are over 21 and have worked for your company for over a year must be offered [a qualified retirement plan](https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-qualification-requirements#:~:text=Employee%20participation%20standards%20must%20be%20met&text=$A%20traditional%20401\(k$,in%20all%20plan%20account%20balances). A traditional 401(k) may require two years of service to receive an employer contribution if the plan specifies the participant is 100% vested in all plan account balances during their first two years. Regardless, the plan must let employees make elective deferral contributions after a year of service. ## 401(k) contribution limits Contribution limits generally rise each year; consider providing 401(k) news during benefits enrollment or shortly after compensation reviews. ### 2024 401(k) contribution limit For 2024, employees may contribute up to [\$23,000 annually](https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000). ### 2025 401(k) contribution limit For 2025, employees may contribute up to [\$23,500 annually](https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000). ## 401(k) catch-up changes Employees over 50 have the option to make “catch-up contributions.” ### 401(k) catch-up change in 2024 Employees age 50 and older are eligible for an additional \$7,500 in [catch-up contributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits). ### 401(k) catch-up change in 2025 Employees age 50 to 59 or 64 and older are eligible for an additional \$7,500 in catch-up contributions. Employees age 60 to 63 are eligible for an additional \$11,250. ## Tax implications of 401(k) Taxes vary between a traditional 401(k) and a Roth 401(k) and depend on when funds are withdrawn. ### Pretax contributions Pretax dollars are used to make contributions, meaning taxes are paid when the money is taken out. ### Posttax contributions Posttax contributions are made with money that has already been taxed. These contributions grow tax-free and are tax- and penalty-free when withdrawn. ## Where to report 401(k) contributions on Form W2 Generally, elective deferrals under a section 401(k) cash or deferred arrangement plan, including a SIMPLE 401(k) arrangement, can be reported in Box 12 of Form W-2 and identified as such with Code D. ## How 401(k) accounts earn money Employees can think of a 401(k) as a savings account with four ways to grow. In most cases, 401(k)s appreciate from: - employee contributions - employers’ matching contributions - the specific funds a 401(k) invests in - compounding interest the 401(k) earns Many of these factors rely on a set formula, making 401(k) growth a bit easier to predict. The performance of specific funds, however, can significantly alter the plan’s compounding growth. In this webinar, learn how addressing the shifting needs of your workforce can aid in recruiting, engagement and retention. [Watch Webinar](https://www.paycom.com/resources/blog/what-is-401k-and-how-does-it-work/) ## 401(k) withdrawal rules Beyond the normal taxes associated with both 401(k) plans, any plan distribution before an employee turns 65 (or sooner with some plans) may result in an additional [income tax of 10%](https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans) of the withdrawal’s amount. ### 401(k) early withdrawals A 401(k) withdrawal is considered early if it’s taken before a participant is 59 and a half, barring further exceptions. It’s impossible to account for everything, but championing employees’ financial well-being may help offset the impact of disaster scenarios. ## 401(k) required minimum distributions (RMDs) When retired employees turn 72, they must start receiving required minimum distributions, also known as “[RMDs](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs).” On the other hand, active employees with 401(k)s or other workplace retirement plans may wait to receive payments until they formally retire. The only exception to this rule is if the active employee owns 5% of the business sponsoring the plan. ## Traditional 401(k) vs. Roth 401(k) The primary difference between a traditional and Roth 401(k) is when taxes are applied. ### Contributions to traditional 401(k) and Roth 401(k) A Roth 401(k) takes contributions after an employee’s income is taxed, so there are no further deductions when money is withdrawn. Both methods have advantages depending on the economic climate, tax trends and personal factors. Providing employees with financial news and insight gives them the knowledge they need to make the best decision. ## Average 401(k) balances by age It’s often the case that the longer someone invests in a 401(k), the higher its balance will be. According to Vanguard, an investment management company, a few decades can make a significant difference: \| Average and Median 401(k) Balances by Age \| \| \| \|---\|---\|---\| \| Age \| Average \| Median \| \| \<25 \| \$6,264 \| \$1,786 \| \| 25-34 \| \$37,211 \| \$14,068 \| \| 35-44 \| \$97,020 \| \$36,117 \| \| 45-54 \| \$179,200 \| \$61,530 \| \| 55-64 \| \$256,244 \| \$89,716 \| \| 65+ \| \$279,997 \| \$87,725 \| ## 401(k) company match Some businesses invest in their workforce’s 401(k) accounts alongside employees. The amount contributed is left up to the employer, but most opt for either a dollar-for-dollar match (up to a certain percentage) or a partial deposit. Both options are attractive to employees. Needless to say, most will favor a higher, matching contribution. ## What happens to my 401(k) if I quit or change jobs? Certain 401(k) balances are transferable. If the employee moves into an independent venture, an individual retirement account (IRA) could provide the option they need to continue safely saving for the future. However, it’s a good idea to consider how IRAs differ from 401(k)s before investing. ## What happens to my 401(k) if I die? If a participant passes away, benefits they would have received usually are paid to a [designated beneficiary](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-death). ### Beneficiaries of 401(k) accounts Employees can name anyone as a beneficiary, including family members, close friends or even a charitable organization. How these benefits are delivered, such as through an annuity or lump sum, is defined by the terms of the specific 401(k) plan. ## 401(k) loans Borrowing from a 401(k) plan may be an option, but there are a few key considerations to keep in mind. ### 401(k) loan limits According to the [IRS](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans#:~:text=Maximum%20loan%20amount,may%20borrow%20up%20to%20%2410%2C000), the maximum amount an employee may borrow is 50% of their vested account balance or \$50,000, whichever is less. If 50% of the vested balance is less than \$10,000, the employee may borrow up to \$10,000. ### Drawbacks of taking out a 401(k) loan Employees who don’t repay the loan, including interest, according to the loan’s terms, may face consequences. Any unpaid amounts become a plan distribution to the employee. In some cases, the plan may require immediate repayment in full if an employee leaves their job. Additionally, a 10% tax penalty may be applied to the taxable distribution amount, unless the employee is at least 59 and a half years old or meets another exception. It’s also worth noting that unpaid loan amounts can have a lasting impact on an employee’s retirement savings. This is something to consider when educating employees on the potential risks and consequences of borrowing from their 401(k) plan. ## Can 401(k) assets be used as collateral for a loan? No, the IRS prohibits 401(k) funds from being used as collateral for a loan. ## 401(k) vs. 403(b) While they’re not too different in theory, a [403(b)](https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-403b-tax-sheltered-annuity-plans) — or a “tax-sheltered annuity plan” — is offered by public schools and certain 501(c)(3) tax-exempt organizations. ## 401(k) vs. IRA 401(k)s are designed for employees. IRAs, on the other hand, are available to anyone, such as independent contractors and small business owners. Although both offer similar tax advantages, IRAs have a lower contribution limit. 2025’s limit for a traditional IRA is [\$7,000](https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000) or \$8,000 for people over the age of 50. IRAs also have wider investment opportunities; even nonearning spouses can contribute to them. ## How does HR support my financial future? None of us can control the future. Instead, we anticipate and prepare for it. This is the essence of a solid [financial wellness strategy](https://www.paycom.com/resources/blog/how-financial-literacy-helps-with-employee-retention/). Helping employees be proactive is more effective — and sincere — than a guarantee. Promoting programs for practical saving and retirement strategies gives employees a greater lease on their future. These can include money management classes, an on-site financial adviser or just helpful resources included in regular HR communication. As employees approach retirement, they’ll start to form a picture of what it’ll look like. Without proper preparation, this period could spur stress. HR professionals like you can ease this transition by promoting responsible habits and incorporating financial wellness into company culture. After all, supporting employees’ financial well-being and helping them prepare for retirement shows that an organization cares about their future, not just its own. Remind employees to consult a licensed financial professional for in-depth investment advice. ## FAQ ### How can I calculate the best amount to contribute? The amount depends on your individual financial goals and situation. A general rule of thumb is to contribute enough to take full advantage of any employer match. ### Can I contribute to both 401(k) and IRA at the same time? Yes. However, the deductibility of your IRA contributions may be limited or phased out depending on your income level and whether you or your spouse are covered by a workplace retirement plan. ### Can I change my 401(k) investment choices? The frequency at which you can make changes varies by plan, but most plans allow you to make them quarterly. ### Can I choose to automatically increase my contributions? Many 401(k) plans offer an automatic escalation feature, which allows you to increase your contributions by a fixed percentage or dollar amount at regular intervals. ### Can I roll over my 401(k) funds into an IRA? You can roll over your 401(k) funds into an IRA when you leave your job or reach age 59 and a half. This can be done directly, without having to take possession of the funds, to avoid any potential taxes or penalties. ### Can 401(k) be converted to a Roth IRA? You can convert your 401(k) funds to a Roth IRA, but this will require you to pay income taxes on the converted amount. ### Where can I check my 401(k) balance? You can typically check your 401(k) balance through your employer’s HR portal, the plan administrator’s website or by contacting the plan administrator directly. ### How do I withdraw from my 401(k)? Withdrawing from your 401(k) before age 59 and a half may result in a 10% penalty, in addition to income taxes on the withdrawn amount. You can withdraw from your 401(k) by contacting the plan administrator or through an online portal. ### Why would a 401(k) be frozen? A 401(k) plan may be frozen due to various reasons, such as a change in plan administrators, a merger or acquisition, or a plan amendment. During this time, you may not be able to make changes to your account or take withdrawals. ### Are 401(k) plans FDIC insured? 401(k) plans are not FDIC insured. ### Does the 60-day rollover rule apply to my 401(k)? If you take a distribution from your 401(k) and do not roll it over into another qualified plan or IRA within 60 days, you may be subject to income taxes and penalties. ### Can my 401(k) be garnished? Your 401(k) account can be garnished, but only in certain circumstances, such as to satisfy a qualified domestic relations order (QDRO) or to pay taxes owed. ### Should my 401(k) be deducted from severance pay? Typically, 401(k) contributions are not deducted from severance pay, as severance pay is not considered regular compensation. ### Should my 401(k) be deducted from bonus checks? It depends on your employer’s plan and the type of bonus. Some plans may allow 401(k) contributions to be deducted from bonus checks, while others may not. ### What is a forced distribution? A forced distribution occurs when a plan participant is required to take a distribution from their 401(k) account, usually due to a plan amendment or termination. ### How does a 401(k) work when you retire? When you retire, you can typically take distributions from your 401(k) account, which may be subject to income taxes. You may also be able to roll over your 401(k) funds into an IRA or take a lump-sum distribution. ### Do 401(k) plans have beneficiaries? 401(k) plans allow you to designate beneficiaries who will receive the account balance in the event of your passing. ### Does a 401(k) beneficiary pay taxes? The beneficiary will be required to pay income taxes on the distribution they receive. ### Can a 401(k) be put in a trust? You can name a trust as the beneficiary of your 401(k) account, which can provide additional protection and control over the distribution of your assets. ### Can a 401(k) be inherited? Your 401(k) account can be inherited by your designated beneficiary. Today’s workforce wants more than just a 401(k) plan. Learn how to create a [benefits package](https://www.paycom.com/resources/webinars/unique-employee-benefits-what-does-your-workforce-really-want/) that meets the changing needs of the modern employee and sets your organization apart from the competition. And check out how Paycom’s [401(k) Reporting tool](https://www.paycom.com/software/401k-reporting/) eases and automates retirement plan management for employers. DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation. ## Related content [A Guide to Open Enrollment for 2025 Blog Post A Guide to Open Enrollment for 2025 Open enrollment is the period when employees can choose benefits their employers offer, including health insurance. Read how open enrollment works for 2025. 20 Minutes to Read](https://www.paycom.com/resources/blog/open-enrollment/) [Why Employers Should Offer Financial Literacy Programs Blog Post Why Employers Should Offer Financial Literacy Programs Financial literacy is key to engaged, satisfied and dedicated employees. Read how to build a financial literacy program in your company. 7 Minutes to Read](https://www.paycom.com/resources/blog/how-financial-literacy-helps-with-employee-retention/) [Paycom x Hearts for Hearing: Innovation and Service Video Paycom x Hearts for Hearing: Innovation and Service See how Paycom’s HR tech transformed a growing nonprofit’s processes and set it up for a bright future.](https://www.paycom.com/resources/non-profit-hr-technology-case-study/) × ## Don’t miss out\! Get the latest HR industry news and trends straight to your inbox. ![](https://www.paycom.com/images/loading--green.gif) Thank you for subscribing. 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