What are 401(k)s and other salary deferral plans?

401(k), 403(b) and 457(b) may not be very descriptive names, but these employer-sponsored salary deferral retirement plans offer strong tax incentives to save for retirement.

These retirement plans allow workers to save and invest for retirement by setting aside some of their salaries for that purpose. By participating in a plan, you can receive tax benefits while giving your money the opportunity to grow.

Most salary deferral plans also give you a degree of control over your money. You determine how much you would like to invest in each of the plan’s investment options.

Here are some retirement plan basics:

    Plan types

    Payroll deductions

    Tax benefits

    Employer contributions

    Vesting

    Options when leaving your employer

Plan types

Plans in which employees contribute to their accounts, also called salary deferral plans, include:

• 401(k)s — generally sponsored by public and private companies
• 403(b)s — sponsored by nonprofit organizations, such as hospitals, schools and religious organizations
• 457(b)s — for government employees
• SIMPLE IRAs — for small businesses
  
  

Payroll deductions

If you contribute to an employer-sponsored salary deferral plan, money will be transferred directly from your paycheck to your selected investment options. It’s easier to save when the investing is done for you automatically.

In 2025, you can contribute up to $23,500 to a 401(k), 403(b) or 457(b) plan. Additional catch-up contributions of up to $7,500 can be made if you are age 50–59 or 64 or older. If you are age 60 -63, a higher catch-up limit of $11,250 applies. If your 401(k) or 403(b) and SIMPLE plan accepts Roth contributions, the same limits apply whether contributions are pretax, Roth after-tax or a combination of both. (Your plan’s rules may vary.) The salary deferral contribution limit for a SIMPLE IRA plans are based on the employer’s size and the amount elected for the employer’s contribution. 

• For plans with 25 or fewer employees, maximum employee contributions are $17,600. Additional catch-up contributions can be made in the amount of $3,850 for those age 50-59, $5,250 for those age 60-63 and $3,850 for those age 64 and over.
  
  
• For plans with 26 or more employees, maximum employee contributions are $16,500. Additional catch-up contributions can be made in the amount of $3,500 for those age 50-59, $5,250 for those age 60-63 and $3,500 for those age 64 and over. However, these plans can qualify for the higher employee contribution limits of $17,600 (and $3,850 catch-up) by opting to make higher mandatory employer matching contributions of 4% of compensation or nonelective contributions of 3%.
   

Tax benefits

Take advantage of tax benefits when you save for your retirement through salary deferral plans.

• Traditional pretax contributions to retirement plans provide tax-deferred benefits. First, you won’t have to pay income taxes on your contributions at the time you contribute. Instead, withdrawals are subject to income tax. Getting a tax break on your contributions can help you save more.
  
  Second, you won’t have to pay taxes on your earnings until withdrawn. So the taxes that you would have paid on earnings stay in your account.
  
  See the impact that tax savings on pretax contributions can have on your paycheck with our payroll deduction analyzer.
  
  

• Roth after-tax contributions may be accepted by 401(k), 403(B) and SIMPLE plans. Roth 401(k)s and 403(b)s can provide tax-free withdrawals.^‡ Contributions are made with money that’s already been taxed, but no income taxes are paid on qualified distributions, including any earnings.
  
  Find out more about roth contributions if your employer offers the option.
   

Tax penalties typically apply if you make withdrawals before the age of 59½, but there are some exceptions.

Employer contributions

Some employers contribute money, or “match,” a percentage of the employee’s contribution.

If your plan offers a match, don’t turn it down. Your employer is basically giving you money. If the match is made with shares of company stock, consider diversifying the rest of your account.

Some employers contribute a non-matching contribution that you may be entitled to even if you don’t contribute. See your summary plan description for details about your plan.

Vesting

In a salary deferral plan, you are always 100% vested in your own contributions. However, you’re often required to work for your employer for a certain length of time to become vested in any employer contributions. (Employer contributions to SIMPLE IRAs are always 100% vested.) 

If you leave the company before becoming fully vested, you may forfeit part or all of the employer contribution. If you’re fully vested when you leave the company, the entire employer contribution is yours. 

Options when leaving your employer

If you don’t need the money right away, consider transferring your assets into a rollover IRA or, possibly, into a new employer’s plan. This can allow you to delay applicable taxes, avoid possible penalties and continue benefiting from tax-advantaged growth potential. You may also be able to leave your assets in your former employer’s plan if your balance is large enough. Cashing out of your salary deferral plan is an option, but you’ll have to deal with the tax consequences. Check with your employer for more details. It’s also important to work closely with your tax and/or financial professional who can help you make the right decision for your situation. 

^* The 2025 employee contribution limits for employers with 26-100 employees who earned at least $5,000 in the prior year is $16,500 if the employer makes matching contributions of 3% of compensation or a non-elective contribution of 2%. These plans can qualify for the higher participant contribution limit of $17,600 (and $3,850 catchup) by electing to increase matching contributions to 4% or non-elective contributions to 3%.

^‡ Withdrawals from Roth accounts are tax- and penalty-free if the account was established at least five years before, and if the participant is at least 59½ years old, has died or is disabled. For nonqualified distributions, earnings are taxable and may be subject to a 10% early withdrawal penalty.