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The 401(k) plan is one of the most important tools for those working in the United States who want to build a solid financial future. For Brazilians and other immigrants starting their professional lives in the country, understanding how this retirement mechanism works can be the difference between a comfortable retirement and years of financial hardship. The 401(k) combines tax benefits, employer contributions, and compound growth to create a long-term nest egg.
Created in 1978 from Section 401, paragraph (k), of the Internal Revenue Code, the plan has become the main retirement savings vehicle in the United States. Unlike the Brazilian INSS, the 401(k) is a defined contribution plan linked to the employer, where the worker accumulates investments throughout their career and withdraws at retirement. The earlier you start contributing, the greater the effect of compound growth on the accumulated wealth.
What is the 401(k)
The 401(k) is an employer-sponsored retirement plan that allows employees to direct a percentage of their gross salary to an investment account with tax benefits. The money is automatically deducted from the payroll, making it easier to save consistently without the worker needing to make monthly decisions.
The vast majority of medium and large companies in the United States offer some version of the 401(k) as part of their benefits package. The deposited funds are invested according to the participant’s choice, usually in mutual funds, index funds, or target-date funds, which automatically adjust asset allocation as retirement approaches.
Traditional vs. Roth 401(k)
There are two main types of 401(k), each with distinct tax implications. The choice between them depends on the worker’s current tax situation and their income expectations in retirement.
Traditional 401(k)
In the traditional model, contributions are made with pre-tax money. This reduces the employee’s taxable income in the year of contribution, resulting in immediate tax savings. Investments grow tax-deferred, with no taxes on gains as long as the money remains in the account.
Taxation only occurs at the time of withdrawal, in retirement, when the retiree’s total income tends to be lower. This model especially benefits workers who are in higher tax brackets during their working years.
Roth 401(k)
The Roth 401(k) works in the opposite way: contributions are made with after-tax money. The advantage is that qualified withdrawals in retirement-including all earnings accumulated over decades-are completely exempt from federal taxes.
This model especially benefits younger workers, who are in lower tax brackets now and may expect higher rates in the future. Many experts recommend a combination of both models to diversify tax risk throughout your career.
Contribution limits
The IRS (Internal Revenue Service) sets annual contribution limits, adjusted for inflation. In 2025, the employee contribution limit was $23,500 for workers under 50. For those aged 50 or older, there was an additional catch-up contribution of $7,500, totaling $31,000 per year.
The SECURE 2.0 Act created a special category for workers between 60 and 63 years old, with an increased catch-up contribution of $11,250, raising the cap to $34,750. The total contribution limit, combining employee and employer portions, was $70,000 in 2025. These amounts are adjusted annually and should be confirmed on the IRS website to check current limits.
Employer contribution
Many companies offer an employer match, a contribution proportional to what the employee deposits. A common format is for the employer to contribute 50% of each dollar deposited by the employee, 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.
Not taking full advantage of the match means leaving money on the table. It is one of the first financial goals any worker in the US should have, as it amounts to an immediate return of 50% to 100% on each dollar contributed, even before considering investment returns.
Tax advantages and growth
Compound growth is the main strength of the 401(k) in the long run. When investment earnings are reinvested and generate new earnings, the multiplying effect becomes substantial over 20, 30, or 40 years. A worker who contributes $500 per month from age 30 to 65, with an average annual return of 7%, accumulates over $800,000 just in contributions and compound interest.
In the traditional model, immediate tax savings allow more money to be invested from the start. In the Roth, tax-free withdrawals in retirement protect against future rate increases. Both models benefit enormously from the time factor, which reinforces the importance of starting to contribute as soon as possible after arriving in the United States.
Withdrawal and rollover rules
Regular 401(k) withdrawals can be made from age 59½ without penalty. Early withdrawals are subject to a 10% penalty on the amount withdrawn, in addition to normal taxation as ordinary income. There are exceptions for hardship withdrawals, significant medical expenses, or permanent disability.
When changing jobs, the participant has four options: keep the plan with the former employer, transfer (rollover) to the new employer’s plan, convert to an IRA (Individual Retirement Account), or withdraw the funds with taxes and penalties. Rolling over to an IRA is usually the most flexible option, as it expands the available investment choices.
Starting in 2024, RMDs (Required Minimum Distributions) became mandatory at age 73 for traditional 401(k) holders, with an increase to 75 scheduled for 2033, according to the SECURE 2.0 Act. Roth 401(k) holders, however, are not subject to RMDs as of 2024, another significant advantage of the Roth model.
For immigrants in the United States, the 401(k) is much more than a job benefit. It is the foundation of retirement planning in the country. Understanding its mechanisms, contributing enough to capture the employer match, and choosing investments suited to your risk profile are fundamental steps for anyone aiming to build long-term financial stability in the US.
Victoria Harper
Editor-in-Chief
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.
