How a 401(k) Works: The Employer Match and the Vesting Schedule

A 401(k) is the retirement account most American employees get through work. It is also where many people leave money on the table: they skip part of the employer match, or they resign a few weeks before their match vests. This guide explains how the account works, how the match adds to your pay, and how the vesting schedule decides how much of that match you keep. All figures are for 2026.

How a 401(k) works

Your employer sets up the plan. You choose a percentage of each paycheck, and the plan puts that money into the account before you receive your pay. Inside the account you choose investments from the plan menu: usually a short list of index funds, target-date funds and a stable-value or money market fund.

Pre-tax or Roth

Most plans now offer two sides.

• Traditional (pre-tax). The money goes in before income tax, so your taxable pay goes down today. Everything comes out as ordinary income later: the contributions and the growth together.
• Roth 401(k). The money goes in after tax. A qualified withdrawal (in most cases, five years on the account and age 59½) comes out with no tax at all.

The choice is a bet on your tax rate. Pre-tax wins if your rate in retirement is lower than today; Roth wins if it is higher. Many people split their contributions between the two sides.

What happens inside the account

While the money stays in the plan, nothing is taxed: no tax on dividends, no tax on gains when a fund is sold, no difference between short-term and long-term. You can rebalance as often as you want at no tax cost. That makes a 401(k) a good home for the holdings that would cost the most tax in an ordinary brokerage account.

The 2026 limits

The $24,500 limit is per person, not per plan. If you have two jobs with two plans in the same year, the two plans share one limit. From 2026, if your wages from that employer in the previous year were above the IRS threshold, your catch-up contributions must go to the Roth side. The figures come from the IRS announcement for 2026 and the IRS table of limits by year.

The employer match: free money with conditions

Many employers add money to your account when you contribute. This is the match. It is part of your pay, but you receive it only if you contribute yourself.

How to read a match formula

A common formula is "50% of the first 6% of pay". It means: for each dollar you put in, up to 6% of your salary, the employer adds 50 cents.

Take a salary of $80,000.

• You contribute 6%, which is $4,800. The employer adds $2,400.
• You contribute 3%, which is $2,400. The employer adds $1,200.

At 3%, you give up $1,200 of pay every year. Over a 30-year career, with growth, that gap becomes a large number. So the first rule of a 401(k) is simple: contribute at least enough to get the full match.

Other common formulas are "100% of the first 3%, then 50% of the next 2%" (the usual safe harbor formula, worth 4% of pay when you contribute 5%) and "100% of the first 4%". Your plan's Summary Plan Description gives the exact formula.

The match and the limits

The match does not count against your $24,500 limit. It counts only against the $72,000 total. So you can contribute your full limit and still receive the full match.

Watch the timing

Most plans calculate the match per paycheck. If you contribute a large percentage and reach $24,500 in September, you contribute nothing from October to December, and the plan may pay no match for those months. Some plans make a "true-up" at the end of the year to correct this; others do not. If your plan has no true-up, spread your contributions across the full year.

Newer match options

The SECURE 2.0 Act gave employers two new options. A plan may let you take the match on the Roth side (it is then taxable income to you in the year it is paid). A plan may also treat your student loan payments as if they were 401(k) contributions, and match them. Ask your HR team if your plan offers either one.

The vesting schedule: when the match becomes yours

Vesting means ownership. The money you contribute from your salary is always 100% yours, from day one. The employer match can come with a vesting schedule: you own a larger part of it for each year you work there.

The two types of schedule

Federal law sets a maximum. A plan can be more generous, but not slower than one of these two schedules.

• Cliff vesting. You own none of the match until a set date, then you own all of it. The longest a cliff can be is three years.
• Graded vesting. You own a larger part each year. The longest a plan can take to reach 100% is six years.
• Immediate vesting. Many plans, and most safe harbor plans, vest the match the day it is paid.

The plan defines a year of service, generally as 1,000 hours of work in 12 months. You become 100% vested when you reach the plan's normal retirement age, or when the employer terminates the plan, whatever your years of service. The rules are on the IRS page Retirement topics: vesting.

What vesting costs when you leave

When you leave the job, you keep the vested part. The plan takes back the rest: this is a forfeiture.

An example. Your plan uses the graded schedule, and you have $20,000 of match in your account. You leave after four years of service. You are 60% vested, so you keep $12,000 and forfeit $8,000. If you stay one more year, you keep $16,000.

Before you resign, find your vesting date on your plan statement. A few weeks can be worth thousands of dollars, and the date is a good point to raise when you agree a start date with a new employer.

Getting money out

A 401(k) is for retirement, and the rules make that clear.

• Before 59½. A withdrawal after you leave the job is taxed as income and carries an extra 10% penalty, unless an exception applies. One useful exception: if you leave your employer in or after the year you turn 55, withdrawals from that employer's plan carry no penalty. The full list is in IRS Topic 558.
• Loans. Many plans let you borrow from your balance and repay through payroll. A loan you do not repay is treated as a withdrawal.
• From 73. You must take a required minimum distribution each year from the pre-tax side. Since 2024, the Roth side has no required distribution while you are alive.
• The whole withdrawal is income. On the pre-tax side the money went in untaxed, so every dollar that comes out is ordinary income at your own bracket. That means the contributions too, not only the growth, and not at the lower rates for long-term gains.

When you change jobs

You can leave the old account where it is, move it to the new employer's plan, or roll it over to an IRA. A direct rollover is not a withdrawal and costs no tax. The real problem is not tax, it is visibility. After three or four jobs, many people have money in three or four plans, with three or four logins and no single view of what they own.

Track your 401(k) with the rest of your portfolio in Cadances

A 401(k) is often the largest account you own, and the one you look at least. Cadances is a portfolio tracker: it puts your 401(k) next to your IRA, your brokerage account and everything else you hold, so you see one total, one allocation and one performance figure.

• An account type priced the way the law prices it. On the Portfolios screen, the 401(k) and the Roth 401(k) are their own account types, next to the 403(b), 457(b), TSP, the IRAs and your taxable accounts. Dividends and gains inside the plan show as untaxed, so your income forecast is not cut by a tax you do not pay.
• The tax bill you are deferring, made visible. For US residents, the Tax screen shows what the IRS lets you put in this year with the catch-up your age unlocks, the age when the money becomes reachable without the 10%, and what a full withdrawal today would cost at your ordinary bracket. Past 73 it reminds you of the minimum distribution. On a Roth 401(k) it names the five-year rule.
• Old plans in one place. Import the export file from your plan provider (Fidelity, Empower, Vanguard or any other), or add the funds by hand. Each old 401(k) can be its own portfolio, so a rollover stays easy to follow.
• Performance and allocation. On Performance, compare your plan with the S&P 500, or with your IRA, over the window you pick. Set allocation rules on each portfolio (for example, bonds at least 20%) and see when your mix drifts away from your target.

One limit to keep in mind: Cadances shows the market value of what you hold. Your plan statement shows how much of the match is vested, so keep your vesting date in view when you plan a job change.

Start free. Create your Cadances account: no card, no time limit. The Free plan holds one portfolio of up to 15 holdings, which is enough for one 401(k). To keep each old plan in its own portfolio, compare the paid plans.

The bottom line

• Contribute at least enough to get the full employer match.
• Read the match formula and the vesting schedule in your Summary Plan Description.
• Check your vesting date before you resign.
• Choose pre-tax or Roth by comparing your tax rate today with your rate in retirement.
• Keep every old 401(k) in view.

Each paycheck you invest is dollar-cost averaging by design, and a diversified mix inside the plan matters as much as the amount you put in.

This article is general information, not tax or legal advice. Your plan document holds the rules that apply to you.