You might have missed the calendar entry, but Friday, Sept. 6, was National 401(k) Day.

We'll be honest: April 1 (04/01) would seem a more logical fit. But to be fair, more serious minds probably wouldn't want people to goof around with one of America's most important financial tools.

The Tea

We've gotten to the point where there are numerous "National ______ Days" for many days on the calendar. It's a pretty transparent practice—a company, interest group, nonprofit, what have you, wants to drum up awareness or business for their cause or product of choice. So they fire up the PR mill and declare that some random date on the calendar will be a national (or if they're feeling particularly feisty, international!) day of observance.

And poof! That's how National Pupuseria Day lines the pockets of your local food truck.

OK. Clearly, this author is a touch jaded at the concept, but in practice, some of these days actually do go toward raising funds for little-known diseases, supporting small businesses, and promoting awareness of good habits and other ways we can improve ourselves.

WealthUp Tip: When you retire, you might have to take action with your 401(k). Be prepared.

Enter National 401(k) Day.

The Plan Sponsor Council of America (PSCA)—a nonprofit trade association "supporting employers who provide employment-based retirement plans and those who support those programs"—is credited with whipping up National 401(k) Day in 1996.

As the internet would tell it*, they chose the first Friday of September so workers can "start the week with Labor Day and end the week with retirement."

OK. We had a chuckle at that. But it's a good cause! 401(k)s are a powerful savings tool that Americans are increasingly relying on to get them through retirement.

A lot of Americans.

As in, more than 70 million Americans.

Also as important? Survey after survey, and study after study, shows that many of us who contribute to a 401(k) don't completely understand how the account works … and that many other Americans have access to a 401(k) but don't actually end up saving (or saving nearly enough) money through it.

So we say "Hooray," 401(k) Day! Even if we're a day late.

The Take

The obvious way to celebrate National 401(k) Day—at least if you're a financial publisher like us—is to pepper our readers with a little knowledge.

We'll do that by answering 14 common questions about 401(k)s that tackle the most important aspects of these all-important savings accounts.

1. What is a 401(k)?

The 401(k) is a retirement plan sponsored by your employer. 

2. How does it work?

When you enroll in your company's 401(k) plan, you elect to have a certain percentage (or dollar amount) of your paycheck withheld every month to fund your account.** Then, you select one or more investments you want to buy, and the percentage of each contributed dollar that should be earmarked for each investment. (For instance, 50% in a U.S. stock fund, and 50% in a U.S. bond fund.)

After that, each time you get paid, the money will be automatically withheld from your paycheck and deposited into your 401(k), and the plan will purchase your chosen investments in your chosen amounts.

3. Should I withhold a dollar amount or a percentage?

Typically, it's best to withhold a percentage of your paycheck, for two reasons:

1. Your savings grow as your salary grows.
2. Your taxable income won't rise as rapidly as it would if you withheld a nominal dollar amount.

4. Doesn't my employer contribute to my 401(k)?

They can—and often do!

Employers can contribute in one of three ways:

• Employer match: An employer agrees that for every dollar or percent you contribute, they will contribute a certain amount, usually up to a limit. For instance, an employer might match you "dollar for dollar" up to 4%, meaning if you contribute 1%, they'll contribute 1%, or if you contribute 3%, they'll contribute 3%. However, if you contribute, say, 5%, the most they'll contribute is 4%.
• Employer nonelective contribution: An employer can also contribute to your account regardless of whether or how much you contribute. For instance, an employer might say that they will contribute 3% of your salary to a 401(k) no matter how much (or little) you contribute.
• Allocations of forfeiture: We'll explain more about "vesting" later, but in some circumstances, if an employee quits or is fired, some amount of their 401(k) funds are forfeited. But it doesn't just go back into the employer's pockets—those funds must be used in a handful of ways, one of which is effectively additional employer contributions to other employees remaining with the company.

Employer matches are by far and away the most common type of employer contribution. According to a PSCA survey, about 98% of 401(k) plans pay a company match or profit-sharing contribution.

5. How much can I contribute to my 401(k) plan?

You actually have to be aware of multiple contribution limits, which typically rise from year to year.

Employee 401(k) contributions are capped at $23,000 in 2024. However, if you are age 50 or older during any point in that tax year, you can contribute an additional $7,500 in "catch-up" contributions this year, or $30,500 in total.

WealthUp Tip: You can actually be strategic about maxing out your 401(k) and other retirement accounts. Here's how.

There's also a limit on all contributions to your 401(k)—as in, employee contributions, as well as all three aforementioned types of employer contributions. In 2024, the limit is the lesser of a.) $69,000, or $76,500 if you include catch-up contributions, or b.) 100% of your compensation. An exaggerated example of the latter: If you earned $50,000 in a year and contributed nothing to your 401(k), but your generous employer wanted to splash the cash into your account, the most they could contribute would be $50,000.

You can learn more with our primer on 401(k) contribution limits.

6. What can I invest in within a 401(k)?

The vast majority of 401(k) plans offer a limited selection of mutual funds that cover several basic stock and bond strategies. For instance, a 401(k) might have U.S. large-, mid-, and small-cap stock funds, international developed- and emerging-market stock funds, U.S. government and investment-grade bond funds, an international bond fund, and target-date funds (which invest in both stocks and bonds at varying percentages that change throughout your life).

7. Can I make changes?

Yes. At any time, you can change both your contributions and your investments.

As it pertains to the latter, you can make two types of changes to your investments:

1. You can change which funds you want to invest in going forward—if you already own shares in a fund but decide not to buy any more shares in that fund going forward, your plan will still continue to hold the shares you've already purchased.
2. You can sell fund shares and reallocate that money to other available investment choices.

Typically, any changes to contributions and forward-looking investment choices will take effect as of your next paycheck.

8. How much does a 401(k) cost?

The answer varies from one plan to the next. You won't pay anything "out of pocket," so to speak—you're not stroking a check to your plan provider. Instead, a small percentage of your savings (usually measured in basis points; a basis point is one one-hundredth of a percentage point) is automatically deducted periodically—generally quarterly or annually—to pay for 401(k) fees. You should be able to find out how much you're paying in the "fee disclosure," which typically can be found in the 401(k) statement or prospectus.

9. How is my 401(k) taxed?

Most people don't exactly love talking about Uncle Sam, but as it turns out, taxes are one of the best parts of a 401(k).

A good way to explain 401(k) taxes is to compare it to a traditional brokerage account, aka a taxable brokerage account. If you open up a traditional brokerage account, you fund it with money you've already earned, and thus already paid taxes on. In any given year, if you, say, sell a stock or fund (and earn a capital gain on that sale), or receive dividends from a stock, or receive interest from bonds, you'll have to pay taxes on those returns. 

However, you fund a 401(k) with pre-tax dollars—that money comes out of your check before income taxes come out (you still pay payroll taxes like Social Security and Medicare on those contributions). Also, you can sell investments and collect dividend and/or interest income within your 401(k) without any tax consequences. The only time you will ever pay taxes on the 401(k) is when you withdraw money from the account. (Hence why 401(k)s are referred to as a "tax-deferred" account—you're deferring paying taxes until later down the road.)

When you withdraw money from a 401(k), you're taxed at ordinary income levels. However, if you draw before age 59½ without a qualified reason, you'll also be hit with a 10% early withdrawal penalty.

10. Are there Roth 401(k) plans?

The term "Roth" refers to an alternative way of taxing a retirement account.

A traditional 401(k), as we explained, is tax-deferred. You fund the account with pre-tax dollars, the money grows tax-free, and you're only ever taxed once you withdraw from the account.

A Roth account works differently. You fund a Roth 401(k) with money that has already been taxed. That's a big upfront hit, sure, but after that, it's all gravy—the money grows tax-free, just like a traditional 401(k), and you get to withdraw that money tax-free. (With exceptions, which we'll get to in a second.)

And if the term "Roth" sounds familiar, it's much more frequently used in conjunction with individual retirement accounts (IRAs).

11. What happens if I leave my job?

If you leave your job, you can no longer contribute to your 401(k) with that employer. But you have a few options for what to do with those savings:

• Roll it over into an IRA: You can take the funds from your 401(k) and deposit them into a new or existing IRA. 
• Roll it over into a new 401(k): You can take the funds from your 401(k) and put them into your new employer's 401(k)—if your new employer offers a 401(k). Note: You can also roll your 401(k) over into other similar qualified employer-sponsored plans, such as 403(b)s and 457(b)s.
• Keep it there: While you can no longer contribute to your 401(k), you typically can keep it open. Unfortunately, in addition to not being allowed to contribute to it, in many cases, you also won't be able to change your investments.
• Cash it out: You could elect to just liquidate the 401(k) and keep the funds without rolling them over into an IRA, 401(k), or other qualified account. But doing so will trigger not just taxes on the entire withdrawal, but a 10% penalty as well.

12. When can I use my 401(k) savings?

The downside of 401(k)s (and other tax-advantaged accounts, for that matter) is that you generally can't just pull money from the account without consequences like you can from a taxable brokerage account.

If you withdraw money from a traditional 401(k) before age 59½, you'll not only pay taxes on those withdrawals, but you'll have to pony up an additional 10% penalty. But there are exceptions where you can withdraw the money free of penalty (though you'll still be taxed). A few examples:

• Up to $5,000 per child per year for certain birth or adoption expenses
• Up to $10,000 for the purchase of a house if you're a first-time homebuyer
• Up to $22,000 if you sustain an economic loss by reason of a federally declared disaster

Roth 401(k)s are a little different. You can withdraw your contributions at any time without having to pay tax or the 10% early withdrawal penalty. However, you may have to pay income tax and a 10% penalty to earnings taken out of the account if you aren't 59½ years old or the account isn't at least five years old. (Again, with exceptions, many of them similar to traditional 401(k)s.)

If you lose or leave a job in or after the year you turn 55, you can start taking withdrawals from your company's 401(k) plan without incurring a penalty.

Lastly, required minimum distributions (RMDs) are mandatory for traditional 401(k)s once you turn 73. However, as of 2024, Roth 401(k)s are no longer subject to RMDs.

13. Can I give my 401(k) to someone else?

You can't exactly liquidate your 401(k) and hand that money off to someone else—at least, not without a boatload of tax consequences.

But you can designate a beneficiary to receive your 401(k) funds in the event that you pass away.

WealthUp Tip: You should max out your 401(k). Also, you should not max out your 401(k). It's complicated.

You can designate a spouse, child, grandchild, relative, charity, or organization as your beneficiary. You can also designate multiple beneficiaries, and outline what percentage of funds will go to each one.

This is generally a simple process, but there are a few rules to remember. For instance, if you're married, your spouse is automatically your beneficiary unless you designate another beneficiary in writing—and under certain circumstances, if you get divorced, your divorced spouse will remain the beneficiary until you choose someone else. Or if you make a minor a beneficiary, that money will go to a court-appointed legal guardian until they reach the age of majority.

14. Where can I learn more about my 401(k)?

Your employer must provide 401(k) documentation to employees. This information typically will be found in a "summary plan description" (SPD); your employer will either provide this on a physical paper handout or direct you to a website where the SPD is posted (usually just the plan's website). The plan's website will also directly provide information about investment selections within the plan, or provide links to third-party sites that deliver information about those investments.

* Editor's note: Just about everyone on the internet claims that the PSCA created National 401(k) Day. However, the PSCA seems to be a little bashful about this fact. Even its own press releases use language like "PSCA has long recognized the Friday after Labor Day as 401(k) Day." A call made to PSCA was not returned by press time, so we could not independently verify that the PSCA created National 401(k) Day. However, we can verify that the PSCA has long supported the awareness campaign and even provided promotional materials—and it continues to do so today. And let's be honest: That's the most important part.

** The SECURE Act 2.0 has mandated that new employees are automatically enrolled in a 401(k) if available, often with a default qualified default investment alternative [QDIA] that's suitable to the employee, such as a target-date fund. 

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We hope you enjoyed learning about 401(k)s this week. Stay tuned over the next few months as we celebrate National Traditional IRA Day, National 403(b) Day, National SIMPLE IRA Day, and National Keogh Plan Day.

Riley & Kyle

WealthUp

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