Employer-Sponsored Retirement Plans: Contributions, Vesting, and Withdrawals

Employer sponsored retirement plans let you defer part of your paycheck into a tax-advantaged account, often with employer contributions on top, and the specific plan available to you depends on who you work for: private companies use 401(k)s, public schools and nonprofits use 403(b)s, state and local governments use 457(b)s, some employers still offer traditional pensions, and small businesses often use SEP or SIMPLE IRAs. For 2026, the employee salary deferral limit for 401(k), 403(b), and governmental 457(b) plans is $24,500, with higher catch-up amounts once you turn 50.¹

Which Plan You Get Depends on Where You Work

Private-sector employers offer 401(k) plans, by far the most common retirement savings vehicle in the country. You choose how much of each paycheck to defer, many employers match a portion of what you contribute, and you invest the balance from a menu of options the plan provides. The account is yours, subject to vesting rules on the employer’s share.²

If you work for a public school, a university, or a 501(c)(3) nonprofit, your employer likely offers a 403(b) plan instead. The mechanics are almost identical to a 401(k): salary deferrals, investment choices, and potential employer contributions, with contributions excluded from your gross income for the year they’re made.³ These plans historically ran through annuity contracts, though most today offer investment lineups that resemble a 401(k).

State and local government employees typically save through 457(b) plans. These are technically deferred compensation arrangements rather than trust-based retirement plans, which produces one meaningful advantage: distributions from a governmental 457(b) are not subject to the 10 percent early withdrawal penalty that applies to 401(k) and 403(b) plans.⁴ You still owe ordinary income tax on withdrawals, but if you leave government service at 52, you can tap the account without an added penalty. State and local governments generally cannot offer 401(k) plans unless they adopted one before May 1986.⁵

Some employers, more commonly in older industries and in government, still offer a defined benefit pension. A pension promises a fixed monthly payment in retirement, calculated by a formula that usually factors in your salary history and years of service. You don’t manage investments and you don’t carry the market risk; the employer does.

Small businesses often skip the compliance overhead of a 401(k) and use a SEP IRA or a SIMPLE IRA instead. In a SEP, only the employer contributes, up to the lesser of 25 percent of your compensation or $72,000 for 2026.⁶⁷⁸

How Much You Can Put In for 2026

The IRS caps how much you can defer each year. For 2026, the employee salary deferral limit is $24,500 for 401(k), 403(b), and governmental 457(b) plans, and $17,000 for SIMPLE IRAs.¹⁸

Once you turn 50, you can add a catch-up contribution: $8,000 for 401(k), 403(b), and 457(b) plans, bringing your total possible deferral to $32,500, and $4,000 for SIMPLE IRAs, for a total of $21,000.¹

The SECURE 2.0 Act created a larger “super” catch-up window for participants aged 60 through 63. If you fall in that age range in 2026, you can defer an extra $11,250 in a 401(k), 403(b), or 457(b), or an extra $5,250 in a SIMPLE IRA, instead of the standard catch-up. Plans are not required to offer the super catch-up, so ask your employer whether yours does.⁸

Separately, the total combined annual addition to your defined contribution account from all sources, including your deferrals, employer matching, and profit-sharing, cannot exceed $72,000 in 2026 under the Section 415 limit. Catch-up contributions don’t count against that ceiling.⁹

Traditional vs. Roth: When Each Wins

Every dollar you contribute goes in under one of two tax structures, and most plans let you split between them.

Traditional contributions come out of your paycheck before federal income tax is calculated. If you earn $80,000 and defer $10,000 into a traditional 401(k), you’re taxed on $70,000 that year. You’ll owe income tax later when you withdraw the money in retirement.

Roth contributions work in reverse. You pay income tax on the money now, get no upfront deduction, and in exchange, qualified withdrawals in retirement come out completely tax-free, including all the investment growth. Designated Roth contributions in an employer plan are treated as elective deferrals but are not excluded from gross income.¹⁰ Roth tends to favor workers who expect to be in a higher tax bracket later, whether from career advancement, pension income stacking, or higher future tax rates. Younger workers early in their careers often come out ahead with Roth because their current bracket is low.

Either way, investments inside the account grow without triggering annual taxes. Dividends, interest, and capital gains compound untouched for as long as the money stays in the plan.

When Your Employer’s Contributions Actually Become Yours

Your own contributions are always 100 percent yours immediately. Employer contributions are a different story. Plans use vesting schedules that determine when the employer’s matching or profit-sharing dollars fully belong to you. For defined contribution plans, the most common schedules are three-year cliff vesting, where you own nothing until year three and then own everything, or a graded schedule that increases your ownership from years two through six.¹¹ If you leave before you’re fully vested, you forfeit the unvested employer dollars. People routinely overestimate their account balance when planning a job change because they forget this.

Vesting for defined benefit pensions runs slightly longer. Most pensions use either five-year cliff vesting or a graded schedule from three to seven years. If you leave before hitting the threshold, you walk away with nothing from the pension, no matter how close you were.

Getting Money Out Before Retirement

Taking money out of a 401(k) or 403(b) before age 59½ triggers a 10 percent additional tax on top of the income tax you owe.¹² On a $20,000 early withdrawal in the 22 percent bracket, you’d lose $2,000 to the penalty and about $4,400 to income tax, leaving roughly $13,600. Governmental 457(b) plans are the exception: distributions are not subject to the 10 percent penalty regardless of age, unless the money was rolled in from a 401(k) or IRA.⁴

Several exceptions waive the 10 percent penalty for 401(k) and 403(b) withdrawals. The most common are permanent disability, medical expenses above a percentage of your income, and a series of substantially equal periodic payments. The SECURE 2.0 Act added a personal emergency expense withdrawal of up to $1,000 per year (once per calendar year, penalty-free) and a withdrawal of up to $10,000 for victims of domestic abuse, which must be requested within 12 months of the incident.⁴ Income tax still applies; only the penalty is waived.

Plan Loans

Most 401(k) and 403(b) plans let you borrow against your balance. A plan loan is not a distribution: you’re borrowing from yourself and repaying with interest into your own account. The maximum is 50 percent of your vested balance or $50,000, whichever is less.¹³ Loans generally must be repaid within five years through level payments made at least quarterly, though loans used to buy your primary residence can stretch longer.

The real risk shows up when you leave your job. Your employer can require full repayment of the outstanding balance upon termination. If you can’t repay, the balance is treated as a taxable distribution and reported on Form 1099-R. You can avoid the tax hit by rolling the unpaid balance into an IRA or another eligible plan by the due date of your tax return for that year, including extensions.¹³ Workers who take a plan loan and then change jobs often get blindsided by a tax bill the following April.

Hardship Withdrawals

Hardship withdrawals are a separate option, and you don’t repay them. The IRS recognizes six safe-harbor categories that automatically qualify: unreimbursed medical expenses, costs to purchase a primary home (not mortgage payments), postsecondary tuition and room and board, payments to prevent eviction or foreclosure, funeral expenses, and certain repairs to your principal residence.¹⁴ The withdrawal is limited to the amount needed for the specific expense and is subject to income tax plus the 10 percent penalty if you’re under 59½.

Governmental 457(b) plans use a narrower framework called “unforeseeable emergency” distributions. Qualifying circumstances include illness, property loss from a casualty, and imminent foreclosure. Accumulated credit card debt does not qualify. You also have to show you can’t cover the expense through insurance, liquidating other assets, or stopping your deferrals.¹⁵

Getting Money Out in Retirement

Withdrawals from traditional pre-tax accounts are taxed as ordinary income. For 2026, federal income tax rates run from 10 percent to 37 percent depending on your total taxable income.¹⁶ State income tax may also apply. A handful of states impose no income tax at all, and others offer partial or full exclusions for retirement income. Checking your state’s rules before you retire can prevent unpleasant surprises.

Qualified Roth distributions from an employer plan are entirely tax-free, but two conditions have to be met. First, you must be at least 59½, deceased, or disabled. Second, five full tax years must have passed since your first Roth contribution to that plan. The clock starts on January 1 of the year of your first designated Roth contribution.¹⁷ If you roll a Roth balance from one employer’s plan into another, the clock may start from the earlier plan’s first contribution date, which works in your favor. Withdraw Roth money before meeting both conditions and the earnings portion is taxable and potentially subject to the early withdrawal penalty.

Required Minimum Distributions

You cannot leave money in a traditional retirement account forever. The IRS requires you to begin taking distributions by a specific age, and the deadline depends on when you were born. If you turn 73 between 2023 and 2032, your required beginning date is April 1 of the year after you reach 73. If you turn 74 after 2032, the starting age shifts to 75.² Each year’s required amount is calculated by dividing your account balance by a life expectancy factor from IRS tables.

Missing an RMD is expensive. The excise tax is 25 percent of the shortfall between what you should have withdrawn and what you actually took.¹⁸ If you catch the mistake and take the missed distribution within the correction window, which generally runs through the end of the second tax year after the shortfall, the penalty drops to 10 percent. Starting in 2024, designated Roth accounts in 401(k) and 403(b) plans are no longer required to take RMDs during the original account owner’s lifetime.

Moving Your Account When You Change Jobs

When you leave a job, you generally have four options for your retirement account: leave it with the old employer’s plan, roll it into your new employer’s plan, roll it into an IRA, or cash it out. The first three preserve the tax-deferred status; cashing out triggers income tax and potentially the 10 percent penalty. Funds move between most plan types: a 401(k) can roll into a 403(b) or an IRA, and vice versa.¹⁹

The cleanest way to move money is a direct rollover, where your old plan sends the funds straight to the new plan or IRA. No taxes are withheld and you never touch the money. The alternative is an indirect rollover: the plan distributes the money to you and you have 60 days to deposit it into another eligible account. The catch is that your old plan withholds 20 percent for federal taxes on the distribution. To roll over the full amount, you have to come up with that 20 percent from your own pocket and deposit the entire original balance into the new account within the deadline. Any portion you fail to redeposit counts as a taxable distribution and may trigger the early withdrawal penalty.²⁰ The direct rollover exists specifically to avoid these problems, and there’s rarely a good reason not to use it.

If Your Pension Plan Fails

Private-sector defined benefit pensions are insured by the Pension Benefit Guaranty Corporation, a federal agency that steps in when a company can no longer fund its pension obligations. If your employer goes bankrupt or terminates the plan due to financial distress, the PBGC takes over as trustee and continues paying benefits up to legal limits. For 2026, the maximum monthly guarantee for someone starting benefits at age 65 is $7,789.77 under a standard single-life annuity.²¹ The cap drops significantly at younger ages: roughly $5,063 at 60 and $3,505 at 55. The PBGC does not cover defined contribution plans like 401(k)s or any government pension plans.²²

1
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
2
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
3
Office of the Law Revision Counsel. 26 USC 403 – Taxation of Employee Annuities
4
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
5
Internal Revenue Service. 457(b) Plans for State or Local Governments – Key Characteristics
6
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
7
Internal Revenue Service. SIMPLE IRA Plan
8
Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits
9
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
10
Office of the Law Revision Counsel. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions
11
Internal Revenue Service. Retirement Topics – Vesting
12
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
13
Internal Revenue Service. Retirement Topics – Loans
14
Internal Revenue Service. Retirement Topics – Hardship Distributions
15
Internal Revenue Service. Unforeseeable Emergency Distributions from 457(b) Plans
16
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
17
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
18
Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
19
Internal Revenue Service. Rollover Chart
20
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
21
Pension Benefit Guaranty Corporation. Maximum Monthly Guarantee Tables
22
Pension Benefit Guaranty Corporation. Understanding Your Pension and PBGC Coverage