The employer match is a guaranteed 100% return and millions of people skip it every year. Here is what the plan actually does, and the two details worth real money.
What it actually is
A 401(k) is a retirement account your employer sponsors. Money goes in straight from your paycheck before you ever see it, it grows without being taxed along the way, and there are rules about getting it out early.
That is the whole idea. Everything else is detail — but two of the details are worth real money, and most people get them wrong.
The match is the highest return you will ever be offered
Many employers match part of what you put in. A common shape is "100% of the first 3%, then 50% of the next 2%" — meaning if you contribute 5% of your salary, they add 4%.
Think about what that is. You put in a dollar and immediately have two. That is a 100% return, guaranteed, before the money is invested in anything. No investment on earth offers that, and it is available to millions of people who leave it on the table every year.
If you contribute nothing else, contribute enough to get the entire match. It is the only free money in personal finance.
One catch: vesting. Your own contributions are always yours, but the employer's share may take years to become yours permanently. Cliff vesting means you get all of it on a specific anniversary and nothing before. Graded vesting means it comes in slices, often 20% a year. Check which one you are on before you resign — leaving two months before a cliff can cost thousands.
Traditional or Roth: when do you want the tax bill?
Most plans now offer both, and the choice is genuinely just about timing.
- Traditional. Contributions come out before tax, so your taxable income drops this year. The money grows untaxed, and you pay ordinary income tax on every dollar you withdraw in retirement.
- Roth. Contributions come out after tax, so you get no break today. The money grows untaxed and qualified withdrawals in retirement are tax-free — including all the growth.
The honest rule of thumb: if you expect to be in a higher bracket later, Roth wins. If you expect to be lower, traditional wins. A resident physician should lean Roth; someone at peak earnings a decade from retirement usually leans traditional.
Nobody knows their future bracket, or future tax law, which is why splitting between the two is a defensible answer rather than a cop-out. What matters far more than this choice is that you are contributing at all.
The IRS caps how much you can defer each year, and there is a second, larger cap covering your contributions plus your employer's. Both are adjusted for inflation most years, and people over 50 can add a catch-up amount. We deliberately do not print the figures here, because an out-of-date number is worse than none — look up the current year at irs.gov, which takes ten seconds and is always right.
Check what you are actually invested in
Opening a 401(k) does not invest the money. Some plans park contributions in cash until you choose, and people have lost years of growth to that alone.
Then look at fees. A fund charging 1% a year instead of 0.1% sounds trivial and is not: over a full career that gap can consume a meaningful share of your final balance. Find the expense ratios in your plan documents and prefer the low-cost broad index options. A target-date fund matching your retirement year is a perfectly respectable default if you would rather not think about it.
The expensive mistake when you leave a job
You have four options: leave it, roll it into the new employer's plan, roll it into an IRA, or cash it out.
Cashing out is almost always the wrong one. Before 59½ you generally owe income tax plus a 10% penalty, and a large chunk vanishes immediately — but the real cost is the decades of compounding that money will never do. A rollover into an IRA or the new plan is a non-taxable event and takes a phone call.
A sensible order of operations
- Contribute enough to capture the full employer match.
- Build a small emergency fund so a bad month does not become credit card debt.
- Clear high-interest debt — a card at 22% beats any expected market return.
- Come back and increase the 401(k), ideally by one percent of salary every time you get a raise. You will not feel it go.
This is educational content, not personalised advice, and 401(k) plans differ in ways that matter. Read your own summary plan description, and talk to a licensed professional before any decision with tax consequences.