What is a 401(k)?
A 401(k) is a retirement account offered through your employer. You contribute pre-tax (traditional) or post-tax (Roth) dollars straight from your paycheck, and the money grows tax-deferred or tax-free until withdrawal. The 2024 IRS employee contribution limit is $23,000, with a $7,500 catch-up if you’re 50 or older. Most employers offer a match, commonly 50% to 100% on the first 3% to 6% of salary. That match is the single highest-return investment you’ll ever access, an instant 50% to 100% return before the market does anything.
Say you earn $80,000 and your employer matches 100% of the first 5% you contribute. If you defer 5% ($4,000), the employer adds $4,000 for free. Skip it and you’ve refused a $4,000 raise. Over a 35-year career at an S&P 500 long-run return of ~10%, the match alone (assuming you also got raises) compounds to well over $1 million. Maxing the $23,000 limit from age 30 to 65 at ~10% builds roughly $6.2M.
Not contributing enough to get the full employer match. You’re leaving a 100% return on the table. Even if you can’t max the $23,000 limit, defer at least up to the full match before doing anything else with your money.
A 60-second lesson on this, with a worked drill, lives inside the Finlo app. Free, forever, on the basics.