Everything You Need to Know About Your 401(k)

The 401(k) is the most widely used employer-sponsored retirement savings vehicle in the United States. For participants navigating the plan in 2026, the rules are meaningfully different from prior years - new contribution limits took effect January 1, a mandatory Roth catch-up requirement now applies to higher-earning participants, and plan design features like automatic enrollment and auto-escalation continue to reshape how workers build retirement savings. This article covers the core mechanics, the 2026 figures, and the provisions most relevant to active participants.

What a 401(k) Is - and How It Works

A 401(k) is a defined contribution plan established under Section 401(k) of the Internal Revenue Code. Employees elect to defer a portion of their pre-tax (or Roth after-tax) wages into an individual account within the plan. Those contributions are invested in options selected by the plan sponsor - typically a menu of mutual funds, target-date funds, or other vehicles - and the account balance grows or declines based on investment performance.

The tax mechanics depend on the contribution type. Traditional (pre-tax) deferrals reduce current taxable income; withdrawals in retirement are taxed as ordinary income. Roth deferrals are made with after-tax dollars; qualified withdrawals are tax-free. Many plans now offer both options, and the choice between them turns on individual tax circumstances - a question best evaluated with a qualified tax professional.

Employers may contribute to participant accounts through matching contributions, nonelective contributions, or profit-sharing. According to the Plan Sponsor Council of America's 68th Annual Survey, 81.3% of plans offered an employer match as of year-end 2024, with the average maximum match at 4.7% of eligible pay (PSCA, "68th Annual Survey of Profit Sharing and 401(k) Plans," psca.org, December 2025).

2026 Contribution Limits (Effective January 1, 2026)

The IRS announced 2026 retirement plan limits in Notice 2025-67, released November 13, 2025. All figures in the table below are currently effective 2026 limits:

(IRS Notice 2025-67, irs.gov/pub/irs-drop/n-25-67.pdf, November 13, 2025)

A participant age 50 or older may contribute up to $32,500 in 2026 ($24,500 + $8,000). Participants ages 60 through 63 may contribute up to $35,750 ($24,500 + $11,250) under the enhanced catch-up provision introduced by SECURE 2.0. The total additions limit of $72,000 reflects the combined ceiling for employee deferrals, employer matching, and any other employer contributions to the same participant's account in the same plan year.

The 2026 Roth Catch-Up Requirement: What Changed for High Earners

One of the most operationally significant changes effective January 1, 2026 is the mandatory Roth treatment of catch-up contributions for certain higher-income participants. Under SECURE 2.0 Act Section 603, participants age 50 or older whose prior-year FICA wages (Box 3 of Form W-2) from the same employer exceeded $150,000 - the 2026 inflation-adjusted threshold, up from $145,000 in 2025 - must make their catch-up contributions on a Roth (after-tax) basis. This requirement applies to 401(k), 403(b), and governmental 457(b) plans.

The IRS issued final regulations on this provision on September 16, 2025 (Treasury Decision 10021). The agency confirmed that plans may operate in good faith compliance for 2026, with full regulatory compliance required for plan years beginning January 1, 2027 (IRS, "Treasury, IRS issue final regulations on new Roth catch-up rule, other SECURE 2.0 Act provisions," irs.gov/newsroom, September 16, 2025).

For affected participants, the practical effect is that catch-up contributions - amounts above the standard $24,500 deferral - will be deposited into a Roth account rather than a traditional pre-tax account. This eliminates the current-year tax deduction on those amounts but may allow for tax-free growth and qualified withdrawals in retirement. Participants whose 2025 FICA wages from their current employer were at or below $150,000 are not subject to this requirement and may continue to designate catch-up contributions as pre-tax or Roth at their election. Individual circumstances vary significantly; participants may find it useful to review this change with a qualified tax advisor.

Plans that do not currently offer a Roth feature face an additional compliance consideration: participants subject to the catch-up mandate in those plans may be unable to make any catch-up contributions until the plan is amended to add Roth. The PSCA and ASPPA have both identified plan amendment as a priority for sponsors in this situation (ASPPA, "2026 401(k) Contribution Limits Issued by the IRS," asppa-net.org, November 13, 2025).

Employer Matching and Vesting: How Employer Contributions Work

Employer matching contributions are not immediately owned by the participant in most plans. Vesting - the process by which a participant earns a non-forfeitable right to employer contributions - is governed by ERISA and individual plan documents. The IRS describes two permissible vesting schedules for employer matches:

• Cliff vesting: 0% vested for years 1 through 2, 100% vested at year 3
• Graded vesting: 20% per year beginning at year 2, reaching 100% at year 6

(IRS, "Retirement Topics - Vesting," irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting, accessed 2026)

Plans may also offer immediate vesting. As of year-end 2024, 44.1% of plans used immediate vesting for employer matching contributions, up from 39.7% in 2023, according to the PSCA's 68th Annual Survey (PSCA, psca.org, December 2025). Employee deferrals - including Roth contributions - are always 100% immediately vested under ERISA.

Participants who separate from an employer before satisfying applicable vesting thresholds forfeit non-vested employer contributions. This is a material consideration for participants evaluating job changes, particularly in the first three to six years of plan participation.

Automatic Enrollment and Auto-Escalation

Plan design has shifted considerably toward features that increase default participation rates. As of year-end 2024, 61% of Vanguard-administered defined contribution plans had adopted automatic enrollment, compared to 10% in 2006. Among plans with 1,000 or more participants, adoption reached 78% (Vanguard, How America Saves 2025, corporate.vanguard.com, 2025).

The participation rate differential is substantial: plans with automatic enrollment recorded a 94% participation rate at year-end 2024, versus 64% for plans relying on voluntary enrollment only (Vanguard, How America Saves 2025, corporate.vanguard.com, 2025).

Auto-escalation - the automatic annual increase of a participant's deferral rate, typically by one percentage point per year - was present in 71% of Vanguard-administered plans as of year-end 2024. The average participant savings rate across those plans was 7.7%, with a median of 6.8%, as of year-end 2024 (Vanguard, How America Saves 2025, corporate.vanguard.com, 2025).

Participants enrolled through automatic features retain the ability to adjust their deferral rates or opt out entirely. Reviewing default contribution rates and investment options periodically may be relevant for participants whose financial circumstances or retirement timelines have changed.

Required Minimum Distributions

Traditional 401(k) accounts are subject to required minimum distributions (RMDs). SECURE 2.0 established RMD starting ages based on birth year, as follows:

• Born 1950 or earlier: RMDs began at age 72
• Born 1951-1959: RMDs begin at age 73
• Born 1960 or later: RMDs begin at age 75 (effective 2033)

(IRS Publication 590-B, "Distributions from Individual Retirement Arrangements," irs.gov/publications/p590b, 2025 edition)

For participants turning 73 in 2026, the first RMD must be taken by December 31, 2026, or may be deferred to April 1, 2027 - though deferring creates two taxable distributions in 2027 and a corresponding increase in ordinary income for that year. The penalty for failing to take a required minimum distribution is a 25% excise tax on the undistributed amount, reduced to 10% if corrected within two years (IRS Publication 590-B, 2025 edition).

Roth 401(k) accounts held within an employer plan are exempt from lifetime RMDs beginning in 2024, under SECURE 2.0 - a change that may affect distribution planning for participants with designated Roth accounts in their current plan.

Withdrawals Before Retirement

Participants who take distributions from a 401(k) before age 59-1/2 generally face a 10% early withdrawal penalty in addition to ordinary income taxes on the distributed amount. SECURE 2.0 introduced several new penalty-free withdrawal provisions effective in 2024 and beyond, including distributions for federally declared disasters, terminal illness, domestic abuse situations, and emergency personal expenses - each with specific eligibility conditions and dollar limits. Participants considering early distributions may find it useful to review current IRS guidance or consult a qualified tax professional before proceeding, as individual circumstances vary and the applicable rules depend on the specific provision invoked.

Considerations for Participants in 2026

• Confirm 2025 FICA wages (Box 3 of Form W-2) to determine whether the Roth catch-up requirement applies. Participants age 50 or older whose 2025 wages from their current employer exceeded $150,000 are subject to mandatory Roth treatment of catch-up contributions in 2026.
• Verify whether the plan offers a Roth feature. Participants subject to the catch-up mandate in plans without a Roth option may be unable to make catch-up contributions until the plan is amended.
• Review vesting status before making employment decisions, particularly for participants within the first three to six years with a current employer.
• Confirm deferral elections reflect the 2026 limits. The employee elective deferral limit increased to $24,500 - participants who set contributions as a fixed dollar amount rather than a percentage may find it useful to update their elections.
• Understand RMD obligations for participants approaching age 73, or for those holding prior employer 401(k) accounts that have not been rolled over.

Allocation decisions - including how contributions are invested across available plan options - depend on individual circumstances, and participants may find it useful to review those decisions with a qualified advisor.

Takeaway

The 2026 plan year brings higher contribution limits across all thresholds and a material new compliance requirement for higher earners: mandatory Roth treatment of catch-up contributions for participants whose prior-year FICA wages exceeded $150,000. Plan design features - automatic enrollment, auto-escalation, and expanded Roth access - continue to expand participant options, but the value of those features depends on whether participants understand and actively engage with them.

Better retirement outcomes start with better plan design. Whether you are a plan sponsor or a participant, Siebert has the tools and expertise to help. Learn more at siebert.com/401k.

1. IRS Notice 2025-67 - 2026 Retirement Plan Contribution Limits. Internal Revenue Service, November 13, 2025. https://irs.gov/pub/irs-drop/n-25-67.pdf
2. IRS Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits. Internal Revenue Service, updated November 2025. https://irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
3. IRS Retirement Topics - Vesting. Internal Revenue Service, accessed 2026. https://irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting
4. IRS Publication 590-B - Distributions from Individual Retirement Arrangements. Internal Revenue Service, 2025 edition. https://irs.gov/publications/p590b
5. Treasury, IRS issue final regulations on new Roth catch-up rule, other SECURE 2.0 Act provisions. Internal Revenue Service, September 16, 2025. https://irs.gov/newsroom/treasury-irs-issue-final-regulations-on-new-roth-catch-up-rule-other-secure-2point0-act-provisions
6. Vanguard, How America Saves 2025. Vanguard, 2025. https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/how-america-saves-2025-key-trends-insights.html
7. PSCA 68th Annual Survey of Profit Sharing and 401(k) Plans. Plan Sponsor Council of America, December 2025. https://psca.org
8. 2026 401(k) Contribution Limits Issued by the IRS. ASPPA, November 13, 2025. https://asppa-net.org/news/2025/11/2026-401k-contribution-limits-issued-by-the-irs