The Many Benefits of a 401(k) Plan

The main benefit of 401(k) plans is that they allow retirement savings to grow tax-deferred. But there are more advantages, especially in comparison to individual retirement accounts (IRAs). These are the lesser-known 401(k) benefits, plus what you need to know about the newer Roth 401(k).

Wish you were more retirement-ready? A financial advisor can help you prepare with the right financial plan for your needs.

What Is a 401(k) Plan?

Named after the federal tax code section that created them, 401(k) plans are voluntary savings programs.

A 401(k)’s investment options often include mutual funds, exchange-traded funds and target-date funds. provide these plans, and employees choose whether to participate. Participation in 401(k)s has risen as pensions have become less common.

When employees participate, a pre-defined amount is taken from their paychecks and sent directly to their 401(k) investment accounts. These pre-tax contributions are deducted from your income before your income tax is calculated.

401(k) Tax Benefits

A retirement account offers tax benefits to inspire people to save more for retirement.

The general tax benefits of 401(k)s are three-fold.

First, contributions are pre-tax. You don’t pay taxes on the money until you make withdrawals during retirement. At the earliest, this is age 59.5.
Because they are not counted as income, your contributions could put you in a lower tax bracket. The result is a smaller tax bill when you save more for retirement.
Third, your savings grow tax-deferred. In a regular investment account, your net gains and dividends are taxed, but in a 401(k) plan, your money grows tax-free as long as it stays in the plan. This allows your earnings to earn earnings – or as a financial advisor would say, to compound. However, keep in mind that you will still owe taxes once you withdraw the money.

To make sure these benefits can help your tax liability and or increase your retirement savings, consider talking to a financial advisor or tax professional.

401(k) Company Match Benefits

Many employers offer to match employee contributions, either dollar-for-dollar or 50 cents to the dollar, up to a set limit. The IRS allows companies to set periods of up to six years before matches are fully vested.

Employer matching encourages employees to enroll in this voluntary plan. Company matches are also a good perk for attracting and retaining talent. .

Whatever the reason a company offers a match, it is free money you wouldn’t otherwise get. Even better, they are tax-deferred – as are its earnings and your earnings’ earnings.

401(k) Late-Saver Benefits

A piggy bank with a slip reading "401(k) contribution.)

If you didn’t start saving for retirement the minute you started working full-time, you’re hardly alone. Even if you waited until mid-career, you’ve got plenty of company.

To help all of the late starters, the government allows annual catch-up contributions of $8,000 to 401(k) plans for people 50 or older in 2025 and 2026. Also beginning in 2025, those between the ages of 60 and 63 benefit from super catch-up contributions to $11,250 in both 2025 and 2026.

This is in addition to the regular allowed employee contribution of up to $24,500 ($23,500 for 2025 and$23,000 in 2024). This is considerably more than the $7,500 annual contribution and the $1,100 catch-up you can contribute to an IRA.

Additionally, if you are a super-late saver, you may want to continue working and contributing to your nest egg in your 70s. You can do this with a 401(k) plan.

However, this is not the case with a traditional IRA. By law, you must cease contributions and begin taking required minimum distributions (RMDs) at age 73.

401(k) Fiduciary Benefits

Because 401(k) plans fall under the Employee Retirement Income Security Act (ERISA), employers have a responsibility to ensure participants’ best interests are put first.

In other words, the plan administrators are held to fiduciary standards. This means that costs don’t have to be the lowest available, but they must be reasonable.

Similarly, investment options must be stable, and key details, such as fees, must be disclosed.

401(k) Emergency Benefits

Under normal circumstances, you have to pay a 10% early withdrawal penalty – on top of income taxes – if you withdraw money before age 59.5. However, some employers allow participants to borrow money from their 401(k) accounts, which they must pay back with interest.

It’s up to plan sponsors if they will allow loans. If so, they will determine repayment terms and the application process. The government only limits the maximum loan amount, which is half the vested amount in the account, up to $50,000. It also caps the repayment time at five years.

In comparison, IRAs do not allow loans. They do have penalty-free hardship withdrawals for such things as health insurance after a job loss, medical costs and first-time home purchase.

Also, 401(k) plan sponsors may allow for hardship withdrawals, but for them to be penalty-free, you generally have to meet strict requirements, such as a disability or medical expenses exceeding 7.5% of your adjusted gross income (AGI).

Consider a Roth 401(k)

Some companies also offer Roth 401(k) plans.

These plans are funded on a post-tax basis so your contributions won’t lower your taxable income. However, the growth is tax-free instead of tax-deferred, so when you make withdrawals at age 59.5, you will owe no taxes on your contributions or earnings. Keep in mind, however, that you will owe taxes on your company match.

You can also make penalty-free withdrawals once you have had the account for at least five years.

Portability and Rollover Flexibility

A 401(k) plan does not stay tied to one employer forever.

When you leave a job, the balance in your account can usually be moved to another qualified retirement account without triggering taxes. This allows retirement savings to continue growing on a tax-deferred basis without the risk of premature taxation.

One option is roll over the balance into a new employer’s 401(k) if the plan accepts rollovers. This keeps savings consolidated in a workplace plan and may preserve access to plan-specific features, such as loans or institutional investment pricing. The funds maintain their tax-deferred status and continue to follow 401(k) distribution rules.

Another option is to roll over your 401(k) to an IRA. This often provides broader investment choices and more control over asset allocation. While the tax treatment remains the same, moving funds to an IRA can change future withdrawal rules, creditor protections and access to plan features like the age-55 early withdrawal exception.

Portability supports long-term retirement planning in a mobile workforce. By allowing balances to move with the worker rather than forcing a cash-out, 401(k) plans can preserve retirement savings while maintaining continuity across employers throughout their career.

Bottom Line

SmartAsset: The Many Benefits of a 401(k) Plan

Stowing savings in a 401(k) plan is a great way to prepare for your golden years. Because taxes are deferred until you retire, your earnings will compound, growing faster than if you had to deduct taxes from the earnings. Additionally, companies often offer matches that can grow your nest egg even more. 401(k) plans feature benefits for late savers, individuals experiencing financial hardship and people who are not sophisticated investors and can use the screening and help of 401(k) plan administrators.

Tips on Managing a 401(k) Account

Once you choose your investments from the menu of options, it’s easy to think you’re done (or want to be). But over time, you should be re-assessing your asset allocation (e.g., what percent is in equity and what is in fixed income) and rebalancing your assets accordingly.
When you change jobs or retire, you may want to roll over your 401(k) to your new job’s plan or to an IRA. Doing this can be tricky, particularly if your account is large. However, a financial advisor can help grow your money and find the right way to invest it for you, while helping you with any potential rollovers. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.