Direct Answer
A Traditional 401(k) is an employer-sponsored defined contribution plan under IRC Section 401(k). Employees defer pre-tax salary up to $24,500 in 2026 ($32,500 age 50+; $35,750 ages 60-63). Contributions reduce taxable income in the year made; withdrawals are taxed as ordinary income. No income limits apply to participation.
Traditional 401(k) Profile: Limits, Rules and Tax Treatment
2026 Contribution Limits
| Category | 2026 Limit |
|---|---|
| Employee elective deferral | $24,500 |
| Age 50+ catch-up (standard) | $8,000 additional (total $32,500) |
| Ages 60-63 higher catch-up (SECURE 2.0) | $11,250 additional (total $35,750) |
| Total annual additions limit (§415) | $72,000 |
| With age 50+ catch-up | $80,000 |
| Compensation cap (§401(a)(17)) | $360,000 |
Source: IRS Rev. Proc. 2024-40. Total annual additions include employee deferrals, employer matching, employer profit-sharing and after-tax employee contributions. Catch-up contributions do not count toward the §415 limit.
Employer Contributions
Employers are not required to contribute to a 401(k) plan, but most do through matching or profit-sharing formulas:
- Matching: Most common formula is 50% or 100% of employee deferrals up to a percentage of compensation (e.g., 100% of first 3%, giving a 3% employer match). Match may be discretionary or formula-based.
- Profit-sharing: Discretionary employer contribution allocated based on a plan formula; not required every year.
- Safe harbor 401(k): An employer contributing certain mandatory minimum matches or non-elective contributions automatically satisfies some nondiscrimination tests.
Employer contributions vest on a plan-defined schedule ranging from immediate (100% vested on day one) to a 6-year graded schedule (20% per year starting year 2). An employee who leaves before full vesting forfeits unvested employer contributions.
Tax Treatment
- Contributions: Employee elective deferrals reduce federal taxable income in the year contributed (pre-tax). State tax treatment varies.
- Growth: Tax-deferred; no tax on dividends, interest or capital gains while inside the plan.
- Distributions: Taxed as ordinary income in the year distributed. No capital gains rates apply to 401(k) distributions.
- Early distributions (before 59½): Subject to 10% additional tax plus ordinary income tax, with exceptions including separation from service at 55+, disability, QDRO distributions to alternate payees, and others.
Required Minimum Distributions
Traditional 401(k) plans are subject to RMDs. However, if you are still employed by the plan sponsor, you may delay RMDs until April 1 of the year after you retire from that employer (the "still working exception"). This exception does not apply if you own 5% or more of the company sponsoring the plan.
- Born 1951-1959: RMD age 73
- Born 1960 or later: RMD age 75
Rolling a 401(k) balance to a Traditional IRA eliminates the still-working exception but consolidates accounts. Consider consulting a tax professional before this decision.
Rollovers
- Direct rollover: Move funds directly to another employer's 401(k) or to a Traditional IRA. No withholding. Most common method.
- 60-day rollover: Receive a distribution and redeposit within 60 days. Plan withholds 20% mandatory federal tax; must make up from other funds to avoid partial taxable distribution.
- Roth conversion: Can convert Traditional 401(k) pre-tax balances to a Roth IRA (taxable in conversion year) or to a Roth designated account within the plan if the plan permits.
Frequently Asked Questions
- What is the 401(k) contribution limit for 2026?
- The 2026 elective deferral limit for a Traditional 401(k) is $24,500. Employees age 50 and older may contribute an additional $8,000 as a catch-up contribution, for a total of $32,500. Employees ages 60 through 63 are eligible for a higher catch-up contribution of $11,250 under SECURE 2.0, bringing their total to $35,750. Source: IRS Rev. Proc. 2024-40.
- Does a 401(k) have income limits?
- No. Unlike Roth IRAs, Traditional 401(k) plans do not have income limits for participation or contributions. Any eligible employee may contribute up to the elective deferral limit regardless of income. The compensation cap used for employer contribution calculations is $360,000 in 2026. Source: IRS Rev. Proc. 2024-40.
- When can I withdraw from a Traditional 401(k) without penalty?
- Withdrawals are generally penalty-free (still taxable) at age 59½. The rule of 55 allows penalty-free withdrawals if you leave your employer in or after the year you turn 55. RMDs begin at age 73 (born 1951-1959) or 75 (born 1960 or later), unless still employed by the plan sponsor.