A 401(k) deferral is the slice of your paycheck you tell your employer to route into your workplace retirement account instead of your bank account. For 2026, you can defer up to $24,500 of your pay, with higher caps if you’re 50 or older.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 The money grows without being taxed each year, and depending on which type you pick, the deferral either lowers your tax bill today or lets you pull the money out tax-free in retirement.
How the Deferral Actually Moves
When you enroll in your employer’s plan, you file a deferral election telling payroll to withhold a set percentage of each paycheck and send it to the plan’s investment custodian. The custodian invests the money in the funds you’ve chosen, and it grows inside the account until you take it out.2Internal Revenue Service. About 401(k) Plans
One wrinkle catches people off guard. Even pre-tax deferrals still get hit with Social Security and Medicare payroll taxes.3Internal Revenue Service. Are Retirement Plan Contributions Subject to Withholding for FICA, Medicare, or Federal Income Tax Your W-2 will show a smaller federal taxable wage figure but the same Social Security and Medicare wage figures as if you hadn’t deferred.
Pre-Tax and Roth: The Same Money, Different Tax Timing
Most plans let you send your deferrals in one of two ways, and the choice is about when you’d rather pay income tax on the money.
Pre-Tax Deferrals
A pre-tax deferral comes out of your gross pay before federal income tax is calculated. Earn $80,000 and defer $10,000, and your taxable income for the year drops to $70,000. Every dollar you withdraw in retirement is then taxed as ordinary income, contributions and investment gains alike.2Internal Revenue Service. About 401(k) Plans
Roth Deferrals
Roth deferrals go in after you’ve already paid income tax. No break this year. In return, qualified withdrawals of your contributions and all the earnings they’ve produced come out completely tax-free, provided you’re at least 59½ and the account has been open for five years.4Internal Revenue Service. Roth Comparison Chart
Picking Between Them
If you expect a lower tax rate in retirement than you’re paying now, pre-tax usually wins because you’re pushing the bill to a cheaper year. If you think your future rate will match or exceed today’s, Roth locks in the current rate and lets decades of growth escape tax. Splitting your contribution between the two is a common hedge. The annual limit covers both types combined, so you can’t max each one separately.4Internal Revenue Service. Roth Comparison Chart
2026 Deferral Limits
The IRS sets the ceiling each year under Internal Revenue Code Section 402(g) and adjusts it for inflation.5Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust For 2026:
- Under age 50: $24,500 combined across pre-tax and Roth.
- Age 50 to 59, or 64 and older: $32,500 total, which is the $24,500 base plus an $8,000 catch-up.
- Age 60 through 63: $35,750 total, using an $11,250 “super” catch-up created by the SECURE 2.0 Act.1Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
The $24,500 cap is per person, not per plan. If you change jobs mid-year or participate in more than one 401(k) or 403(b), your combined elective deferrals across all of them cannot exceed the single limit.6Internal Revenue Service. Consequences to a Participant Who Makes Excess Annual Salary Deferrals Governmental 457(b) plans run on a separate limit, so 457(b) contributions do not eat into your 402(g) cap.
Employer Match Doesn’t Count Against Your Limit
A separate ceiling under Section 415(c) caps the total of everything flowing into your account in a year: your deferrals plus your employer’s match and any other employer contributions. For 2026 that combined ceiling is $72,000, or between $80,000 and $83,250 with catch-up eligibility.7Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs Most people never approach it. It matters if you have a rich match or receive profit-sharing.
The practical takeaway: employer matching contributions don’t reduce how much you personally can defer.8Internal Revenue Service. Matching Contributions Help You Save More for Retirement They grow tax-free alongside your money and get taxed when withdrawn.
If your employer matches up to 5% of pay and you’re only deferring 3%, you are leaving free money behind. Set your deferral rate high enough to capture the full match before you think about anything else in your financial life.
Setting or Changing Your Election
You file your election through your employer’s HR or benefits portal. Enter a percentage of pay rather than a flat dollar amount when the system lets you. A percentage rides along with raises so your savings rate holds steady without any attention from you.
Most plans let you divide your deferral between pre-tax and Roth in any mix, so long as the total stays within the annual cap. A change usually takes effect on the next full payroll cycle, not mid-period, so build in a little lead time if you’re aiming at a year-end target. For a contribution to count toward a given tax year, it has to be withheld from your paycheck by December 31 of that year. Starting late in the year? You may need a higher percentage on your remaining checks to reach the total you want.
What Counts as Pay You Can Defer From
Your percentage applies to whatever the plan document defines as compensation. Most plans include base salary, overtime, bonuses, and commissions. Some plans exclude items like severance or short-term incentive pay. If you’re expecting a large bonus and want to defer from it, ask HR whether the plan treats it as eligible compensation before payday.
The Two-Employer Trap: Excess Deferrals
Contribute too much, whether to a single plan or across two employers in the same year, and the excess has to come out by April 15 of the following year, along with any earnings it generated.9Internal Revenue Service. 401(k) Plan Fix-It Guide – Elective Deferrals Werent Limited to the Amounts Under IRC Section 402(g) Notify the plan by March 1 and it has until April 15 to distribute the correction.5Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
Miss April 15 and the excess gets taxed twice: once in the year you contributed it and again when it eventually comes out of the plan. You get no cost basis in it, so there’s no credit for having already paid tax on it.6Internal Revenue Service. Consequences to a Participant Who Makes Excess Annual Salary Deferrals Track your contributions across employers during the year and the problem doesn’t happen.
Deferred Money Is Locked Up Until 59½
The tax benefits come with strings. You generally cannot pull deferred money out of a 401(k) until you reach age 59½, leave the employer, become permanently disabled, or die (at which point your beneficiary receives it). Some plans permit hardship withdrawals for immediate and heavy financial needs such as medical bills, preventing eviction, or buying a primary residence.10Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
Take money out before 59½ with no exception and you owe ordinary income tax on the distribution plus a 10% early withdrawal penalty.11Internal Revenue Service. Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Exceptions that waive the 10% include separation from service after age 55, substantially equal periodic payments, total disability, and several categories the SECURE 2.0 Act added, such as emergency personal expenses and qualified disaster distributions.12Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
Auto-Enrollment and a Roth Rule Coming in 2027
Any 401(k) plan established after December 29, 2022, must automatically enroll new employees as of the 2025 plan year. The default deferral rate starts at 3% of pay and steps up one percentage point each year to at least 10%.13Internal Revenue Service. Retirement Topics – Automatic Enrollment You can opt out or set your own rate at any time. A 3% default is almost never enough to fund a retirement on its own, so treat it as a floor and revise upward when you can.
One more change is coming. Starting with the 2027 tax year, participants who earned more than $145,000 in FICA wages from their employer in the prior year will have to make any catch-up contributions as Roth deferrals rather than pre-tax.14Internal Revenue Service. Treasury, IRS Issue Final Regulations on New Roth Catch-Up Rule, Other SECURE 2.0 Act Provisions Plans may adopt it early in 2026 on a voluntary basis, so higher earners making catch-up contributions should check with the plan administrator. Anyone under 50 or below the wage threshold is unaffected.