401(k): How the Retirement Plan Works in the USA

Anyone planning to build a life in the United States needs to understand how the country’s retirement system works – and the 401(k) is at the center of this planning. Unlike the Brazilian INSS, the American model relies heavily on individual contributions, and the 401(k) is the main tool for accumulating long-term wealth with tax benefits. Knowing its rules, limits, and types is the first step to ensuring financial stability in the future.

What Is the 401(k)

The 401(k) is an employer-sponsored retirement plan, regulated by Section 401(k) of the United States Internal Revenue Code. It allows employees to allocate a percentage of their gross salary to an investment account aimed at retirement. Contributions are automatically deducted from the paycheck, and many employers offer a matching contribution – the so-called employer match – contributing an amount proportional to what the employee deposits, up to a limit set by the company.

For immigrants, the 401(k) represents a significant opportunity: any worker with a formal employment relationship in the US can participate, regardless of nationality. As long as the employer offers the plan and the employee meets the eligibility requirements – usually a minimum period of employment with the company – it is possible to start contributing.

Traditional vs. Roth

There are two main types of 401(k), each with distinct tax implications. In the Traditional 401(k), contributions are made with pre-tax money. This means the contributed amount reduces taxable income for that year, resulting in immediate tax savings. On the other hand, withdrawals made during retirement are taxed as ordinary income.

In the Roth 401(k), contributions are made with after-tax money. There is no tax deduction now, but qualified withdrawals in retirement – including all accumulated earnings – are completely tax-free. This type tends to be more advantageous for those who expect to be in a higher tax bracket in the future.

An important update starting in 2026: workers who earned more than $150,000 in FICA wages in the previous year are required to direct their extra contributions (catch-up contributions) exclusively to the Roth option, as determined by the IRS.

Contribution Limits in 2026

The IRS annually adjusts the contribution limits for retirement plans. For 2026, the limits are as follows:

• Regular employee contribution: up to $24,500 per year (increase from 2025)
• Catch-up contribution (age 50 or older): up to an additional $8,000, totaling $32,500
• Super catch-up (ages 60 to 63): up to an additional $11,250, totaling $35,750
• Combined employee + employer limit: $72,000

These limits apply equally to both Traditional and Roth 401(k). For individual IRA accounts, the annual contribution limit in 2026 is $7,500, with an additional $1,100 catch-up for those over 50.

How It Works in Practice

The process of enrolling in a 401(k) is simple. Upon joining a company that offers the plan, the employee chooses the percentage of salary to contribute and selects from the available investment options – which typically include mutual funds, index funds, fixed income funds, and target-date funds that automatically adjust allocation as the retirement date approaches.

The employer match is one of the biggest benefits of the 401(k). A common format is for the employer to contribute 50% of what the employee deposits, up to a limit of 6% of salary. For example, if the annual salary is $80,000 and the employee contributes 6% ($4,800), the employer adds $2,400. This is money that should not be left on the table – contributing at least enough to capture the full match is considered a basic rule of financial planning in the US.

Investments within the 401(k) grow tax-deferred (in the traditional model) or tax-free (in the Roth), allowing the effect of compound interest to work more efficiently over decades.

Withdrawal Rules

401(k) funds are designed for retirement, and the access rules reflect this premise. Penalty-free withdrawals are allowed starting at age 59½. Withdrawals before this age are subject to a 10% penalty on the amount withdrawn, in addition to normal income tax in the case of the Traditional 401(k).

There are limited exceptions to the 10% penalty, including permanent disability, certain medical expenses that exceed a percentage of adjusted gross income, and the so-called Rule of 55 – which allows penalty-free withdrawals for those who leave their job at age 55 or older. Loans against the 401(k) balance are also possible in many plans, though they should be used with caution to avoid compromising long-term accumulation.

What to Do When Changing Jobs

Job changes are common in the United States, and the 401(k) follows the worker in different ways. The options available when leaving a company are:

• Keep the plan with the previous employer: allowed in most cases, but no new contributions
• Rollover to the new employer’s 401(k): direct transfer, with no tax consequences
• Rollover to an IRA: offers greater investment flexibility and individual control
• Withdraw the funds: possible, but subject to taxes and the 10% penalty if the participant is under age 59½

The most financially recommended option is the rollover, which preserves the tax benefit and keeps the assets growing for retirement.

401(k) for Immigrants

For Brazilians and other immigrants in the United States, the 401(k) is an essential tool that should be incorporated into financial planning from the first job. Some points deserve attention: the 401(k) is tied to formal employment, so self-employed workers do not have access to this specific plan, but can use alternatives such as the Solo 401(k) or the SEP IRA. Additionally, in case of returning to Brazil, the funds remain in the US and can be withdrawn according to the normal rules, with possible tax implications in both countries.

Starting to contribute early, taking advantage of the employer match, and choosing the tax option that best fits your profile are decisions that, over 20 or 30 years, can make the difference between a comfortable retirement and financial vulnerability. The 401(k) is not just a job benefit – it is the foundation of retirement planning in the United States.

Victoria Harper

Editor-in-Chief

Meet the author

Leading journalism and editorial content at Visto n’ Visa, Victoria helps make immigration topics clear, trustworthy, and easy to understand. Her focus is on delivering useful, human, and relevant content for people exploring new paths abroad.