How Does a 401(k) Grow? Match, Limits, and Compounding

The employer match is free money

Always contribute at least enough to get the full employer match. A typical 50 percent match on the first 6 percent of pay is an instant 50 percent return on those dollars, before any market return. Skipping the match is leaving compensation on the table.

2026 contribution limits

• Employee deferral limit: 24,500 dollars
• Catch-up for age 50 and over: 8,000 dollars
• Enhanced catch-up for ages 60 to 63 under SECURE 2.0: 11,250 dollars

Tax-deferred compounding

Inside a traditional 401(k) there is no tax drag on dividends, interest, or realized gains while the money grows. You pay ordinary income tax when you withdraw in retirement. Removing the annual tax drag lets returns compound on a bigger base every year.

Traditional vs Roth 401(k)

A traditional 401(k) is pre-tax now, taxable later. A Roth 401(k) is after-tax now, tax-free qualified withdrawals later. The same 2026 24,500 dollar employee limit covers both combined. Which is better depends on whether your current marginal tax rate is higher or lower than your expected rate in retirement.

Worked example

An employee earning 80,000 dollars contributes 6 percent (4,800) and the employer matches 50 percent on the first 6 percent (2,400). The effective contribution rate in year one is 9 percent of pay, and the match roughly doubles the employee's own contribution before any market return.