Key Highlights

  • A 401(k) is set up by an employer and allows up to $25,500 of employee contributions in 2027, while an IRA is opened by the individual and allows up to $7,500.
  • Pre-tax contributions lower this year's taxable income, and Roth contributions are taxed now with qualified withdrawals tax-free later.
  • An employer match adds money to a 401(k) when the worker saves, and each plan sets its own match formula.
  • A worker earning $50,000 who saves 10% of pay puts away $192.31 from each biweekly paycheck.

A first Job brings a benefits form with a question that sounds simple: how much of each paycheck goes into the 401(k)? The answer depends on how the account works and on the yearly limit the Internal Revenue Service (IRS) sets. For 2027, the IRS set those limits on November 12, 2026, at $25,500 for a 401(k) and $7,500 for an individual retirement account (IRA). This guide explains both accounts from the start, in plain terms.

What a Retirement Account Does

A retirement account is a Savings Account with tax benefits for money set aside for later life. The account holds investments, such as funds, chosen from the Options the plan or provider offers. In exchange for the tax benefits, the government sets rules: a yearly limit on contributions and an added tax on withdrawals before age 59½, with exceptions. The IRS reviews the limits each year for cost-of-living changes.

How a 401(k) Differs From an IRA

The difference starts with who sets the account up. A 401(k) comes through an employer. The worker elects to send part of each paycheck into the plan, and the employer deposits it. In 2027, a worker can contribute up to $25,500, and the same limit applies to 403(b) plans at schools and nonprofits, governmental 457 plans and the federal Thrift Savings Plan. Some plans add an employer match, and each plan decides whether to offer a Roth option.

An IRA is opened by the individual at a bank, brokerage or other financial firm and funded directly. The 2027 limit is $7,500 and covers all of a person's traditional and Roth IRAs combined, so the money can be split between the two types but not exceeded. Contributions are capped at taxable compensation for the year, such as wages, with an exception when a spouse has taxable compensation. An IRA opened by an individual carries no employer match.

The two accounts work side by side. A worker with a 401(k) can also contribute to an IRA, and each account has its own limit.

Pre-Tax vs Roth: When the Tax Break Arrives

Both accounts raise the same question: when does the tax break arrive? With pre-tax contributions, money is taken from pay before federal income tax is figured, so Taxable Income falls this year, and withdrawals in retirement are taxed as income. With Roth contributions, the money goes in after tax, so there is no break this year, but qualified withdrawals, including the earnings, are tax-free. A Withdrawal qualifies after a five-year Waiting Period and at age 59½, or on disability or death.

A 401(k) can offer both types if the plan chooses to, and an IRA comes in both forms, called a traditional IRA and a Roth IRA. The choice comes down to taking the tax break now or in retirement. Higher earners face income limits on Roth IRA contributions and on traditional IRA deductions, which the full 2027 limits guide covers.

The Employer Match: Extra Money From the Employer

A 401(k) can offer one benefit that an individually opened IRA cannot: the employer match. Some employers add money to a worker's 401(k) when the worker contributes, and each plan sets its own formula. Take a plan that matches 100% of the first 3% of pay. A worker earning $50,000 who saves $1,500, which is 3% of pay, receives another $1,500 from the employer. A worker who saves nothing receives no match.

Two rules apply to the match. It does not count toward the $25,500 limit, which covers only the worker's own contributions. And a plan can require years of service before the match fully belongs to the worker, a schedule called vesting. A worker's own contributions always belong fully to the worker.

What Saving Costs in a Paycheck

Consider a worker earning $50,000 a year, paid every two weeks across 26 paychecks. Pay before taxes is $1,923.08 per paycheck. At 5% of pay, the worker saves $2,500 a year, or $96.15 per paycheck. At 10%, the total is $5,000 a year, or $192.31 per paycheck. At 15%, it reaches $7,500 a year, or $288.46 per paycheck.

Because pre-tax contributions lower taxable income, Take-home pay falls by less than the amount saved. Even at 15%, the worker sits far below the $25,500 limit, which equals 51% of this salary. The limit is a ceiling, not a target, and it matters most to workers who can save a large share of pay.

Catch-Up Contributions: Not Yet for First-Time Savers

Workers aged 50 and over can save more than the regular limit through catch-up contributions. In 2027, the 401(k) catch-up is $8,500, or $11,750 for workers who turn 60, 61, 62 or 63 during the year, and the IRA catch-up is $1,100. Those amounts lift the 401(k) maximum to $34,000 for workers aged 50 and over and to $37,250 for ages 60 to 63. A first-time saver under 50 can ignore them for now.

Three First Steps

Three steps put all of this into practice. First, find out whether the employer offers a plan and a match. The plan's documents state the match formula and the vesting schedule, and whether a Roth option exists.

Second, choose a contribution rate. A percentage of pay rises with each raise, while a fixed dollar amount stays flat until the worker changes it.

Third, choose pre-tax or Roth where both are offered, and review the setting each January, when the new limits take effect.

Back to the Benefits Form: What Shapes the First Number

The benefits form asks for one number, and three things shape it. The employer match, where a plan offers one, decides how much the employer adds. The choice between pre-tax and Roth decides when the tax break arrives. The limits of $25,500 for a 401(k) and $7,500 for an IRA mark the ceiling. A worker earning $50,000 who saves 10% of pay puts away $5,000 a year, well below that ceiling. The first number is a starting point, and the plan's documents show when and how it can change.