You’re contributing enough to get the full company match because everyone says that’s “free money.” But your 401(k) elections haven’t been touched since you started the job. You’re not sure if you’re invested in the right funds, whether you should contribute more, or if Traditional vs. Roth even matters.
Your 401(k) is likely your largest retirement asset. Small optimizations compound dramatically over decades. Here’s how to maximize this powerful tool.
Understanding the Match (And Not Leaving Money Behind)
First, ensure you’re actually capturing the full match:
Common match formulas:
- 100% match on first 3% + 50% match on next 2% = contribute 5% to get full match
- Dollar-for-dollar up to 6% = contribute 6% to get full match
- 50% match up to 6% of salary = contribute 6% to get 3% match
Check your summary plan description or HR portal for your specific formula. Missing the full match is leaving guaranteed 50-100% returns on the table.
Vesting schedules matter:
Your contributions are always yours. Company match might vest gradually (20% per year over 5 years) or all at once (cliff vesting after 3 years). If you’re leaving before fully vested, you forfeit unvested match. Time job changes accordingly when possible.
Traditional vs. Roth 401(k): Making the Right Choice
If your plan offers Roth 401(k), you have a choice to make:
Traditional 401(k):
- Contributions reduce taxable income now
- Pay taxes on withdrawals in retirement
- Better if you’re in a high tax bracket now and expect lower bracket in retirement
Roth 401(k):
- Contributions made with after-tax dollars
- Withdrawals in retirement are tax-free
- Better if you’re early career or expect higher tax rates in future
Simple decision framework:
- Under 35 with moderate income: Prioritize Roth
- High earner (22% tax bracket or higher): Traditional likely better
- Uncertain? Split 50/50 between Traditional and Roth
- Expect income to drop soon (career break, grad school): Roth while income is low
How Much to Contribute Beyond the Match
The match is the minimum, not the maximum:
2026 contribution limits:
- Under 50: $23,000 annual limit
- 50 and older: $30,500 with catch-up contributions
The 15% guideline:
Aim to save 15% of gross income for retirement (including employer match). If your employer contributes 5%, you contribute 10%. This isn’t mandatory—it’s a target that typically produces comfortable retirement.
Contribution priority order:
- Contribute enough for full match (guaranteed return)
- Pay off high-interest debt (credit cards over 15%)
- Max out HSA if you have one ($4,300 individual, $8,550 family)
- Contribute to Roth IRA ($7,000 limit)
- Increase 401(k) contributions toward the $23,000 limit
Choosing the Right Investments
Your 401(k) investment choices matter enormously:
The target-date fund option:
Easiest choice. Pick the fund closest to your expected retirement year (Target Retirement 2055, 2060, etc.). The fund automatically adjusts from aggressive to conservative as you age. Check the expense ratio—under 0.20% is good, under 0.10% is excellent.
The three-fund approach:
If your plan has good low-cost index funds, build your own portfolio:
- 60-70% U.S. Stock Index Fund (S&P 500 or Total Market)
- 20-30% International Stock Index Fund
- 10-20% Bond Index Fund
What to avoid:
- Actively managed funds with expense ratios over 0.50%
- Company stock beyond 5-10% of portfolio (concentration risk)
- Exotic investments you don’t understand (commodities, sector funds)
- Money market or stable value funds if you’re more than 10 years from retirement
The Expense Ratio Reality
High fees silently destroy wealth:
The math:
$500 monthly invested over 30 years at 7% return:
- 0.05% expense ratio: $577,000
- 0.50% expense ratio: $528,000 (lose $49,000)
- 1.00% expense ratio: $486,000 (lose $91,000)
That 1% “small” fee costs you $91,000 over your career. Check your fund expense ratios today. If your plan only offers high-cost funds (over 0.75%), contribute just enough for the match, then invest additional savings in an IRA with better fund options.
When to Rebalance
Market movement throws your allocation off target:
Annual rebalancing:
Once yearly, check if your allocation has drifted more than 5% from target. If you started at 70% stocks / 30% bonds and are now at 78% stocks / 22% bonds, rebalance back to 70/30 by selling winners and buying what declined.
Automatic with target-date funds:
If you’re in a target-date fund, rebalancing happens automatically. No action needed on your part.
What to Do When Changing Jobs
Don’t make emotional decisions with your 401(k):
Your options:
1. Leave it (if balance over $5,000):
Acceptable if your old plan has excellent low-cost funds. Consolidating everything later is more work but not urgent.
2. Roll to new employer’s 401(k):
Simple if new plan is good. Everything in one place for easier management.
3. Roll to IRA:
Best option for most people. You get access to better, cheaper investment options than most 401(k) plans offer. Open IRA at Vanguard, Fidelity, or Schwab, then request direct rollover from old 401(k).
Never:
Cash out your 401(k). You’ll pay income tax plus 10% penalty if under 59.5. A $20,000 balance becomes $13,000 after taxes and penalties. That same $20,000 left invested could become $150,000+ by retirement.
The 401(k) Loan Trap
Many plans allow borrowing against your balance. This is almost always a bad idea:
Why it seems appealing:
You’re borrowing from yourself and paying yourself interest. No credit check required. Feels like accessing your own money.
The hidden costs:
- Your borrowed money misses market gains during repayment
- You pay loan back with after-tax dollars
- If you leave your job, full balance usually due within 60 days
- Default triggers taxes and penalties on entire loan amount
Only consider if: facing foreclosure, severe medical emergency, or other genuine crisis with no alternative. For regular expenses or wants, don’t touch retirement savings.
The Bottom Line
Your 401(k) is one of the most powerful wealth-building tools available. Tax advantages, employer match, and automatic contributions create a system that builds wealth while you focus on living your life.
But it only works if you optimize it: contribute beyond the minimum, choose low-cost funds, select appropriate Traditional vs. Roth, and avoid loans and early withdrawals. Small choices now create enormous differences over decades.
Log into your 401(k) today. Check your contribution percentage, expense ratios, and fund choices. Make one improvement—increase contributions 1%, switch to lower-cost funds, or adjust your allocation. Then set a calendar reminder to review again in one year. Your future self will thank you.
