401(k) Guidelines: Eligibility, Contributions, and Withdrawals

A 401(k) is an employer-sponsored retirement account governed by federal law, and the 401(k) guidelines that matter most to you cover four things: whether you qualify to participate, how much you can put in each year, how the money is taxed going in and coming out, and when you can access it without a penalty. For the 2026 tax year, the personal deferral limit is $24,500, with higher ceilings if you’re 50 or older.¹

Who Can Join the Plan

Federal law caps how restrictive an employer can be about letting you in. The standard rule allows an employer to require you to be at least 21 years old and to have completed one year of service, meaning a 12-month period in which you worked at least 1,000 hours. Employers can be more generous and let you participate sooner. They cannot demand more.²

Part-time workers get a separate protection. For plan years beginning after December 31, 2024, long-term part-time employees who log at least 500 hours in two consecutive 12-month periods must be allowed to contribute.³ That threshold used to be three consecutive years, so more part-time employees now qualify.

If your employer set up its 401(k) after December 29, 2022, the plan must automatically enroll you at a contribution rate between 3% and 10% of pay, with an automatic annual increase of one percentage point until you reach at least 10% (capped at 15%).⁴ You can opt out or pick a different rate. Plans that existed before that date, along with businesses with 10 or fewer employees, businesses less than three years old, church plans, governmental plans, and SIMPLE 401(k) plans, are exempt from the automatic enrollment requirement.

How Much You Can Contribute in 2026

You can defer up to $24,500 of your own pay into a 401(k) for the 2026 tax year.¹ If you’re 50 or older at any point during the calendar year, you can add another $8,000 in catch-up contributions, for a personal ceiling of $32,500.⁵

A larger catch-up applies during a narrow four-year window. If you turn 60, 61, 62, or 63 during the calendar year, your catch-up limit rises to $11,250, allowing total deferrals of $35,750.⁵ The enhanced amount disappears at 64, when you drop back to the standard $8,000.

A separate ceiling limits the total that can go into your account from all sources combined, including your deferrals, employer match, and any profit-sharing. For 2026, that total cannot exceed the lesser of 100% of your compensation or $72,000, not counting catch-up amounts.⁵ Contributions above the personal or combined limit have to be corrected, generally by returning the overage to you, and the excess may be subject to additional tax.⁶

Employer Match and Vesting

Your own deferrals are always 100% yours the moment they hit the account. Employer contributions can come with a waiting period before you fully own them. Federal law allows two vesting approaches for employer contributions to a defined contribution plan.⁷

Under cliff vesting, you own nothing of the employer’s contributions until you complete three years of service, and then you become fully vested at once. Under graded vesting, ownership builds in steps over six years: 20% after two years, then another 20 percentage points each year until you reach 100% at six years. Leave before you’re fully vested and you forfeit the unvested portion. That is one of the most common ways people leave money behind when they change jobs.

Some employers use a Safe Harbor design instead. Safe Harbor plans make all employer contributions immediately 100% vested with no waiting period, which is why smaller companies often prefer them.

Under the SECURE 2.0 Act, employers can also treat qualified student loan payments as if they were 401(k) deferrals when calculating the match, so your employer can deposit a matching contribution based on your loan payments even when you aren’t putting money into the plan yourself. This is optional for employers. If yours offers it, you’ll typically need to certify your loan payments to the plan administrator.

Traditional vs. Roth Tax Treatment

Every dollar you contribute is either traditional (pre-tax) or Roth (after-tax), and the two are mirror images.

Traditional contributions come out of your paycheck before federal income tax, lowering your taxable income for the year. The money grows without annual taxation. When you withdraw in retirement, every dollar comes out as ordinary income, taxed at your rate then.

Roth contributions are taxed on the way in. There’s no upfront break, but qualified distributions, including all the investment gains, come out tax-free as long as you’ve held the account for at least five tax years and you’re at least 59½.⁸ If you expect your tax rate to be higher in retirement than it is now, Roth contributions can save you a significant amount over time.

Mandatory Roth Catch-up for Higher Earners

Beginning with the 2026 plan year, if you earned more than $145,000 in FICA wages from your employer during the prior calendar year and you’re 50 or older, all of your catch-up contributions must go into a Roth account. Pre-tax catch-ups are no longer an option. Your regular deferrals up to $24,500 can still be traditional or Roth at your discretion. The rule applies only to the catch-up portion.⁹

When You Can Take Money Out

The default rule: you can withdraw from a 401(k) without penalty starting at age 59½. Withdraw earlier and the distribution is hit with a 10% additional tax on top of ordinary income tax.¹⁰

Several exceptions waive the 10% penalty before 59½:

Distributions after death or in the event of your disability.¹⁰
The Rule of 55: if you separate from your employer during or after the calendar year you turn 55, you can take penalty-free distributions from that employer’s plan. It applies only to the plan at the employer you left, not to IRAs or plans from prior jobs you’ve already rolled over.
A series of substantially equal periodic payments spread over your life expectancy, once started, must generally continue for at least five years or until you turn 59½, whichever comes later.¹¹

None of these exceptions makes the money tax-free. A traditional 401(k) distribution is still ordinary income even when the 10% penalty is waived.

Hardship Withdrawals

Some plans permit hardship withdrawals while you’re still employed, but only for an immediate and heavy financial need. The IRS recognizes a specific list:

Medical expenses for you, your spouse, dependents, or beneficiary
Costs of buying your primary home (not ongoing mortgage payments)
Tuition and room and board for the next 12 months of postsecondary education
Payments to prevent eviction from or foreclosure on your primary residence
Funeral expenses
Certain repairs to damage to your primary home

A hardship withdrawal is taxable and may still carry the 10% early withdrawal penalty if you’re under 59½. You cannot pay the money back into the plan later.¹²

Required Minimum Distributions

You can’t leave money in a traditional 401(k) forever. Starting at age 73, you must take required minimum distributions each year, with your first RMD due by April 1 of the year after you turn 73. If you’re still working and don’t own 5% or more of the company, you can delay RMDs from that current employer’s plan until you actually retire.¹³

Each RMD equals your account balance divided by a life expectancy factor from IRS tables. If you take less than required, you owe a 25% excise tax on the shortfall, which drops to 10% if you correct the miss within a designated correction window that generally runs through the end of the second tax year after the year the tax was imposed.¹⁴

Borrowing From Your Own Account

Many plans allow loans against your balance. A loan avoids the income tax and early withdrawal penalty that come with a distribution, but the rules are strict. You can borrow up to 50% of your vested balance or $50,000, whichever is less. If half your vested balance is under $10,000, the plan may allow a $10,000 loan. Repayment runs at least quarterly over a maximum of five years, with a longer term available only for a loan used to buy your primary residence.¹⁵

Miss payments or leave your job with a loan balance outstanding and the unpaid amount becomes a taxable distribution, plus the 10% penalty if you’re under 59½. The borrowed money also isn’t invested while it’s out of the account, which quietly cuts into long-term growth.

Moving the Money When You Leave a Job

When you leave an employer, your 401(k) balance has four possible destinations: stay in the former employer’s plan, move to your new employer’s plan, roll to an IRA, or cash out (which triggers taxes and usually a penalty). Rollovers keep the money growing tax-deferred and are the most common route.

A direct rollover, also called a trustee-to-trustee transfer, sends the funds straight from the old plan to the new account. No taxes are withheld and no deadline applies. It is the cleanest way to move the money.¹⁶

An indirect rollover routes a check to you first, and your old plan must withhold 20% for federal taxes. You have 60 days from receiving the distribution to deposit the full original amount into a qualifying retirement account. To keep the entire balance tax-deferred, you have to make up that withheld 20% out of your own pocket at deposit time and then recover it when you file your return. Deposit only the 80% you received and the withheld portion is treated as a taxable distribution.¹⁷ Miss the 60-day window entirely and the whole distribution becomes taxable income, potentially with a 10% early withdrawal penalty on top. The IRS can waive the 60-day requirement in limited hardship situations, but counting on a waiver is not a plan.

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
2
Office of the Law Revision Counsel. 26 U.S. Code 410 – Minimum Participation Standards
3
Internal Revenue Service. Notice 2024-73 – Additional Guidance with Respect to Long-Term, Part-Time Employees
4
Congress.gov. H.R.2954 – Securing a Strong Retirement Act of 2022
5
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
6
Internal Revenue Service. Consequences to a Participant Who Makes Excess Annual Salary Deferrals
7
Office of the Law Revision Counsel. 26 U.S. Code 411 – Minimum Vesting Standards
8
U.S. Government Publishing Office. 26 U.S.C. 402A – Optional Treatment of Elective Deferrals as Roth Contributions
9
Internal Revenue Service. Treasury, IRS Issue Final Regulations on New Roth Catch-Up Rule, Other SECURE 2.0 Act Provisions
10
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
11
Internal Revenue Service. Substantially Equal Periodic Payments
12
Internal Revenue Service. Retirement Topics – Hardship Distributions
13
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
14
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
15
Internal Revenue Service. Retirement Topics – Loans
16
Internal Revenue Service. Topic No. 413, Rollovers from Retirement Plans
17
Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust