Is a 401(k) Worth It?

Until the 1980s, most of America used pensions to plan for retirement. Offered by employers, these defined-benefit plans set up a fund on behalf of workers in order to calculate each employee’s retirement benefits individually. This put all the responsibility and associated risks on the pension fund and the employer. Therefore, they were responsible for making estimates, including life span and projected earnings, for each employee and ensuring there were sufficient savings for every qualified worker. Then Section 401(k) of the Internal Revenue Code was enacted, and the tax-advantaged 401(k) retirement savings account was born.

Consider working with a financial advisor as you seek to find the most optimal ways to build your retirement savings.

What Is a 401(k)?

A 401(k) plan is a popular retirement savings vehicle offered by employers to millions of Americans.

When an employee sets up a 401(k) account through their workplace, they agree to put some of their paycheck into the account. There, the money goes to work in different investments, such as bonds and mutual funds.

The capital gains earned from these assets grow tax-deferred. This means the account holder does not pay taxes on that money until they withdraw it, usually in retirement.

Your 401(k) plan is subject to annual contribution limits, however. For 2026, the limit is $24,500, up from $23,500 in 2025. Employees age 50 and older can also benefit from an additional catch-up contribution of $8,000 in 2026, increased from $7,500 in 2025.

What Are the Advantages of a 401(k)?

401(k) plans are popular for a reason. They come with several benefits, including tax advantages, that make them more attractive for your retirement savings.

Before-Tax Contributions

401(k) contributions come directly out of your paycheck before taxes. As a result, that money does not count towards your taxable income, potentially putting you in a lower tax bracket. Therefore, you may face a smaller tax bill than you would have otherwise.

Additionally, your savings grow on a tax-deferred basis. As long as the funds remain in your 401(k) account, they are not taxable. This includes any earnings you make, such as capital gains. You only pay taxes on these and your contributions when you make withdrawals.

This is often useful for workers who fall into a lower tax bracket after retirement.

Matching Contributions

Some employers offer their workforce a 401(k) match.

Within this arrangement, they match your 401(k) contributions, up to a certain cap. A common program for many companies is a 50% match up to the first 4% or 5% you contribute to the account.

Assuming you make an annual salary of $50,000, say you contribute 4% of your earnings to your 401(k) retirement plan, totaling $2,000. Your employer then contributes an additional 50% of that amount, meaning you earn another $1,000 on top.

Other employers offer a dollar-for-dollar match, meaning they contribute the same amount as you up to a cap. Thus, they double the yearly contributions to your 401(k).

Automatic Savings

401(k) plans take a lot of the savings work out of your hands.

For example, you don’t have to manually designate where your money goes each paycheck. Instead, your company may set up automatic payroll deductions or automatic contributions for you.

This can help new workers avoid procrastination when they start working. An auto-enrollment feature helps new hires start saving for retirement as soon as possible.

Emergency Benefits

In most cases, a 10% penalty fee applies when you withdraw too early from a 401(k). If you take out money before you turn 59.5, you’ll face this fee on top of income taxes.

The only exception to this is the Rule of 55. This allows workers who are fired, laid off or quit during or after the year they turn 55 to withdraw from their current company’s 401(k) penalty-free.

However, some employers give participants the chance to borrow funds from their 401(k). More specifically, certain plan sponsors allow participants to take a 401(k) loan from their retirement plan.

However, the rules and procedures vary between each plan. In most cases, the loans have a cap amount that you must pay back over time using payroll deductions. However, these funds do not face taxation as long as the loan meets specific rules, and you follow your repayment schedule on time.

Alternatively, you can make a hardship withdrawal to cover qualified expenses. These include medical care, funeral costs or college tuition, but you must demonstrate an “immediate and heavy financial need,” according to the IRS.

Financial Safeguards

All employers have a fiduciary duty to their employees through their 401(k), which means they must act in the best interest of the employee. This is thanks to the Employee Retirement Income Security Act (ERISA).

Therefore, your plan administrator can’t shape your 401(k) toward risky and expensive investments. Instead, they need to shape the plan around secure investments with reasonable fees. They must also disclose information such as historical performance data and administrative costs, so employees can make informed decisions.

ERISA has an additional benefit for participating workers: your assets are protected from creditors. However, this does not protect your funds from specific government measures, such as criminal fines or income tax.

What Are the Disadvantages of a 401(k)?

A piggy bank under an umbrella in the rain.

While a 401(k) comes with potential benefits, they also feature some drawbacks. Understanding the potential disadvantages of a 401(k) allows you to better plan for your future.

Limited Investment Opportunities

A 401(k) is a long-term savings and investing plan.

When you make contributions, you have the option of purchasing various investments. However, plan sponsors are responsible for the selection available to participants. Many create a list of mutual funds, with half of them serving as target-date funds.

Target-date funds are a collection of investments that grow progressively more conservative as you near retirement. These funds are usually titled and, therefore, coincide with the expected retirement year of the individual.

Because of potential limitations, it’s best to compare all your options in a 401(k) plan. If you can’t find a selection that fits your financial needs, you may need to consider a separate investment account.

High Fees

A 401(k) plan is not free. It typically comes with several fees, including management and record-keeping fees. While any plan should disclose fees on an annual basis, it can still catch participants off guard. As a result, you may be paying high fees without understanding why.

If you have concerns about the cost of your 401(k), it’s always good to contact your workplace’s HR department or reach out to the plan sponsor. Either can help you read through the plan’s fine print.

Additionally, they can help you break down the employer’s matching program. In some cases, this may help compensate for losses caused by fees.

“Hard to Access” Funds

While you put your own money into a 401(k) account, you can’t just access it whenever you want. There are rules in place that can result in consequences if you do.

In most scenarios, a 401(k) withdrawal before you hit age 59.5 incurs a hefty IRS penalty. If you fail to follow the withdrawal rules, you must pay a 10% fee on top of the postponed income tax.

There are very few scenarios that allow you to access your money before this age, aside from the Rule of 55.

Minimal or Nonexistent Employer Match

In some cases, employers match up to a specific amount of your plan contributions. The match limit amount might be a certain percentage of your salary, the amount of your contribution or your employer may express the cap as a dollar amount. For instance, an employer may offer to match up to 100% of your contributions up to “x” amount.

However, the availability of a 401(k) matching program depends solely on your employer, as not every workplace offers one. Even if they do, the match may not be for much.

While not always a red flag, you may also want to pay attention to when your employer matches your contributions. Some workplaces have minimum service requirements, meaning the employer only matches contributions after you work a certain amount of time.

What Are the Alternatives to a 401(k)?

There are a few reasons why a 401(k) might not be right for you. Maybe your employer doesn’t offer a contribution matching program, or perhaps you want to avoid the high fees.

Either way, it may be worthwhile to consider other retirement plan options. Note that you can have both a 401(k) and an IRA at once, though they each have separate contribution guidelines.

Traditional IRA

A traditional IRA is a popular retirement savings option, regardless of whether you have a 401(k). It allows you to put your money away so it can grow tax-deferred. Therefore, you only pay taxes when you withdraw funds during retirement.

Additionally, you can use your contributions to lower your yearly taxes. You just deduct the amount you contribute from your taxable income.

Like a 401(k), you pay a penalty for early withdrawals and must begin required minimum distributions (RMDs) by April 1 of the year after you turn 73.

The contribution limits are lower with an IRA, though. For 2026, you can only deposit up to $7,500 annually until you turn 50. After that age, you can contribute an extra $1,100 per year, bringing the “catch-up” contribution limit to $8,600.

Roth IRA

A Roth IRA is a similar store for cash before retirement, but it has unique features.

You contribute after-tax dollars with a Roth IRA, so, you can’t lower your taxable income before you put the fund away. Instead, your money grows tax-free, and you avoid taxation on withdrawals made during retirement.

Roth IRAs follow the same rules on contribution limits as traditional IRAs. However, there are income limits for who can contribute to a Roth IRA account.

For 2026, single filers and heads of household with a modified adjusted gross income (MAGI) less than $153,000 (or $242,000 for married and joint filers) can contribute the full amount. Those who earn more face lower contribution limits, with contributions being fully phased out at $168,000 and $252,000, respectively.

SEP IRA

In some cases, your employment status may push you toward other retirement plan options. A simplified employee pension IRA (SEP IRA) is open to self-employed individuals or small business owners.

SEP IRAs work similarly to traditional IRAs, sharing a range of investment choices and tax advantages. However, they have the additional benefit of higher contribution limits.

For 2026, your SEP IRA contribution cannot be more than 25% of your yearly compensation, or $72,000, whichever is less.

Taxable Brokerage Account

It is also possible that none of the available retirement savings options fit your situation, or perhaps, you already maxed out your contribution limits. In that case, it may be time to consider a taxable brokerage account.

While they offer no tax advantages, there are no withdrawal restrictions. You can use the funds whenever you please, and it won’t affect your tax bill. Plus, many brokerage accounts come with minimal fees, and you have complete customization over your investment choices.

Is Investing in a 401(k) Right for You?

Overall, whether a 401(k) plan is worth it depends on your individual situation.

There are two major benefits that appeal to employees using a 401(k) plan: the tax savings and employee matching programs. By contributing to a 401(k), you reduce your yearly income, thus lowering your tax burden. Plus, you can take advantage of the deferred taxation and the additional savings available through your employer.

Still, other investment options may come with lower fees or greater flexibility. That can be valuable to certain investors. Plus, you may not want to have restrictions on your own money.

Before enrolling in a 401(k) program, consider working through your investment goals with a financial advisor.

When Should a 401(k) Be Your First Investing Priority?

A 401(k) is often the strongest investment choice when an employer offers a matching contribution.

Contributing at least enough to receive the full match effectively increases your compensation, since the employer is adding money to your retirement savings that you did not have to earn or save yourself. Few other investment options offer this built-in advantage.

Traditional 401(k) plans can also be especially attractive for workers in higher tax brackets. Contributions reduce current taxable income, which can lower the amount owed in federal and, in many cases, state income taxes. The higher your marginal tax rate, the more valuable that deduction becomes relative to investing with after-tax dollars.

A 401(k) may also be a priority for individuals who benefit from automated saving. Payroll deductions move money directly into the account before it ever reaches a checking account, reducing the risk of spending those funds elsewhere. Over long time horizons, consistent contributions can have a larger impact on retirement outcomes than sporadic investing.

Younger workers or those early in their careers may view a 401(k) as a foundational account for building retirement savings, particularly when paired with low-cost index funds or target-date funds. Starting early allows compound growth to work over decades, even if contribution amounts are modest at first.

A 401(k) may be less compelling as a first priority if no employer match is offered and plan fees are unusually high. In those cases, directing initial savings to an IRA or another low-cost investment account may provide better flexibility and cost control before increasing 401(k) contributions.

Bottom Line

A woman reviews if a 401(k) is worth it.

A 401(k) is a popular way for many Americans to start saving for retirement. They are easy to set up through the workplace and come with various benefits. However, they may not be available to you or they may not be the right choice. Then, it’s important to consider your options.

Tips on Saving for Retirement

Planning for retirement can be quite an undertaking. Many of us aren’t equipped to handle it alone. The good news is that you don’t have to, as a financial advisor can guide you through the process. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Having a retirement age in mind can help you plan out your savings. But that might also be extra financial pressure. You want to make sure you’re saving at the right rate to support yourself in the future. That might require taking advantage of your employer’s 401(k) matching program. It’s essentially money already owed to you that can make a difference in your long-term savings.