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  • Writer's pictureNathan Zarcaro

Here is Why 401(k) Plans Are Still Worth it In 2023

Updated: Dec 20, 2023

Americans are unenthused about saving for retirement. Study after study validates this point. Unfortunately, though, retirement is not something that you can achieve without decades of hard work.

Luckily, in recent years, employees and retirement providers alike have made strides simplifying the process for workers nationwide.

In 2023, the most common way to save for retirement is through a workplace 401(k) plan. But are 401(k) plans still worth it in 2023?

Keep on reading to learn more!

What are 401(k) plans?

A 401(k) plan is a type of employer sponsored retirement savings account offered to most full-time employees of businesses in the United States. Available to about 68% of working Americans, 401(k) plans are widely available and are designed to help employees of a company save for their retirement. 

Over the past few decades, 401(k) plans have increased in popularity and have largely overtaken pension plans as a method to prepare for retirement.

One attractive feature about them is that employers have the option to match a certain percentage of employee contributions, effectively rewarding Americans with free money if they contribute a certain percentage of their income towards retirement.

401(k) plans are known as a defined contribution plan, meaning the onus is on individual employees to prepare for their retirement. This contrasts with other workplace plans like pensions, which are known as defined benefit plans.

Features of 401(k) plans

401(k) plans have a number of interesting features that set them apart from other retirement and savings plans out there. Among these features are unique:

  • Eligibility requirements

  • Plan contribution limits

  • Contribution matches

  • Investment options

  • Withdrawal rules

  • Tax treatment

Here is how 401(k) plans work.


Generally, employers offering 401(k) plans allow employees to start contributing within about 30 days of hire, though it is possible that you may also need to work a certain number of hours first as well.

Other potential 401(k) eligibility rules you may encounter include:

  1. Age requirements: Some companies will not grant access until you are at least 18 years old.

  2. A match waiting period: Though you may be able to contribute to your plan shortly after your date of hire, you may need to wait an additional length of time before you are eligible to receive any company match offered.

All eligibility information should be readily accessible through your employer's plan documents, which is known as a SPD, or Summary Plan Description. Your HR department should also be able to answer any other questions that you may have.

Plan contribution limits

Much like IRAs, HSAs, and other types of tax advantaged accounts, 401(k) plans come with maximum annual contribution amounts. In 2023, these limits are as follows:

  • $22,500 annually for plan participants under age 50

  • $22,500 plus an additional $7,500 catch-up provision for workers over age 50

These contribution limits are subject to change each year, pending new IRS guidance. Contributions are typically made via payroll deduction, similar to HSA plans and in contrast to IRAs.

These details and contribution limits apply to the two different type of 401(k)s: Traditionals and Roths.  More to come on the two major types of 401(k) plans in a minute.

Contribution matches

I've mentioned a couple of times that employers oftentimes match a percentage of employee 401(k) contributions. In my mind, this is the most powerful feature of any retirement plan out there. In fact, it is critically important to always make sure you receive the maximum 401(k) match you are eligible for.

At my job, my employer offers a 75% match on my first 6% of contributions. In essence, this means that I'm eligible to earn 4.5% of my salary in addition to the 6% I contribute each pay period.

Don't be fooled, though - there are much more lucrative matches out there.

But given that it is recommended to save 15-20% of your income for retirement, the fact that I can save 10.5% of my income while only making a 6% contribution is fantastic.

Investment options

In contrast to IRAs, 401(k) plans typically have a limited selection of mutual funds for you to choose from. This selection, oftentimes called a plan lineup, typically consists of:

  • An S&P 500 index fund

  • A selection of target date funds, named by target retirement accounts (through 2065 or 2070)

  • Some bond funds

  • Some international exposure

But for most investors, this is more than sufficient. Many of the actively managed options in your lineup, though, may carry hefty management fees that you'll want to take into account.

Oftentimes, the size of your plan's lineup and the management fees depend on the size of your employer's 401(k) plan. Larger plans tend to have more scale and can qualify for more advantageous fund pricing.

Withdrawal rules

Under normal circumstances, 401(k) participants will be unable to withdraw their funds until they reach 59 1/2 years of age.

However, there are stipulations that can help you to access your cash in an emergency if needed.

For instance, you may be able to access funds in the event of financial hardship, like job loss. But unless you withdraw funds for a qualified distribution, either due to your age or permanent disability, you will be subject to a 10% penalty, plus any applicable federal or state taxes.

Of course, it is never advisable that you raid your retirement account, but in an emergency, it could be your only path forward.

401(k) tax treatment

Traditional 401(k) contributions are made on a pre-tax (deferred) basis, which lowers your taxable income in the present and allows your capital gains to grow more quickly. In turn, you'll pay applicable federal tax when you withdraw the funds after you retire.

But many companies now offer a Roth 401(k) provision as well, which allows you to pay federal income tax now and then grow and withdraw your funds tax-free!

Traditional vs. Roth 401(k)s

Today, there are two varieties of 401(k) plans, both of which are commonly offered by larger employers.  They are:

  1. Traditional 401(k)s

  2. Roth 401(k)s

But who is each type of 401(k) right for?

Who should use a Traditional 401(k)?

While neither this, nor anything else in this piece, should be construed as investment advice, Traditional 401(k) plans are generally best suited for those that have reason to believe that they’ll pay less in taxes in the future than they are today.

Given the United States national debt and budget deficit, future tax policy seems harder to predict than it has been in decades.

That said, Traditionals seem to be a good option for the following types of people:

  • Those in their peak earning years

  • Those that will have lower incomes in retirement than they do now

Again, all this is subject to change given future tax code changes, but the important part is that you start to save something now!

Who should use a Roth 401(k)?

Now, who should use a Roth 401(k) to help prepare for retirement?

Typically, I’d advise the following groups of people to consider using the Roth provision, if offered to them:

  • Those that have reason to believe that they are in the lowest tax bracket of their career and rest of life

  • Those that want decades of tax-free growth and a tax-free withdrawal come retirement time

401(k) pros and cons

There are many pros, as well as a couple of cons, to participating in 401(k) plans. Among the greatest benefits are:

  • Lower taxable income now: If you participate in a traditional plan, you'll lower your taxable income here, regardless of your income. Traditional IRAs are only tax deductible for Americans of certain income levels.

  • Free match money: Participating in your workplace 401(k) is likely to make you eligible for some sort of match on your contributions. And while they vary by company, this is free money that you should absolutely take.

  • High contribution limits: Depending on your income level, you're likely going to need to save more money for retirement than your IRA will let you. 401(k)s can be really handy for this purpose, as you can put away nearly $23,000 this year alone, over three times the IRS limit for IRAs.

  • Creditor protection: A little known fact, in most instances your savings are protected from creditors in the event that you need to declare bankruptcy. And while you hope you never need this provision, it is a huge pro.

Still, there are a couple of negatives to these plans that deserve attention:

  • Limited investment options: My biggest gripe with 401(k) plans are the limited investment options oftentimes available in a plan lineup. Further, like I mentioned, these mutual funds tend to have investment expense ratios higher than comparable funds that you could buy outside of your plan.

  • Required minimum distributions: Like Traditional IRAs, you'll be required to start taking distributions from your Traditional 401(k) once you turn 72 years old. These distributions will be taxable and may limit your ability to pass your unused retirement savings down to your heirs.

In my mind, these pros far outweigh the couple of cons, and they make 401(k) plans completely worth it!

How to make 401(k) contributions

Unlike IRAs on the market today, 401(k) plans can typically only be contributed to through payroll deduction.  This means that, come the end of a calendar year, you will not have the option to transfer money from a savings account into a 401(k) the way you are able to do with a Traditional or Roth IRA.

Your employer probably has portal or other site that you should visit to manage your contributions.  It is normally done though your 401(k) provider directly.

My employer offers its 401(k) plan through Fidelity, and to change my contribution levels, I just visit Fidelity’s NetBenefits site in order to view and change my contributions.

How much should you contribute to a 401(k)?

The golden question in preparing for contribution.  Common convention says that you should save as much money as humanely possible.  But just picking a percentage and guessing is far from a strategy that you can bank on.

Remember my example from earlier.

Your match absolutely counts towards this target.  So, if your employer offers a 6% match, for instance, your 6% match already gets you to 12% of your 15-20% target threshold.  A little more money spread across the year will get you to your target without much difficulty!

Of course, you can use IRAs or other types of accounts to save money, either for the short term or for retirement.

If you still have questions, it can be an excellent idea to consult a compound interest calculator, which will help you to determine whether your current savings trajectory is enough to help you reach your ultimate retirement goals.

How I use my 401(k) to save for retirement

There are a number of ways that you can take advantage of your workplace 401(k) in order to prepare for your retirement.  I’m going to share my strategy that all but guarantees me I’m going to retire with millions of dollars to enjoy in my golden years.

First, you’ll want to know whether your employer offers a match on your contribution.  Most employers do, though the actual percentage can vary greatly from employer to employer.

1. I take my company match

Herein lies my first tip to maximizing your 401(k): always contribute enough money to receive your employer match.

It is part of your compensation plan and money that your employer budgeted to pay you, so why would you not take it?  They’re helping me (and you!) to prepare for your retirement one day.

Typically, I’ll start by contributing the minimum amount of money required to receive a full match.

2. I turn to my IRA

Once I’m earning the full company match, I’ll pivot to my Traditional or Roth IRA.  I won’t shut my 401(k) contributions off of course, since I still want to earn the full match.

But, I’ll begin to contribute to my IRA, as much as I can afford to.  Ultimately, I’ll return to my 401(k) and increase my payroll deductions, but not until I have maxed out an IRA for the calendar year.

Again, the reason for this is simply to strike that balancing act between the free money offered by my employer in my 401(k) and taking advantage of the more robust investment options offered in my IRA.

This is not to say that my strategy is right or wrong: this is merely what I do in an attempt to save as much money as possible in investments that make the most sense for me at this stage in my life.

3. I invest in a cheap S&P 500 index fund

To alleviate this concern as much as possible, I normally pick an S&P 500 index fund with the lowest expense ratio I can find.  Again, not investment advice, but something that you should pay attention to in an attempt to avoid having your potential investment returns eaten away at by management and other investment-based fees.

401(k) plan alternatives

While you likely want to contribute to your 401(k), at least enough to receive any match you're eligible for, there are plenty of other retirement saving options available to you, including IRAs, Health Savings Accounts (HSAs), Employee Stock Purchase Plans, and others!

There are other employer sponsored retirement plans on the market too, including:

  • 403(b): 403(b) plans are very similar to 401(k)s, but are generally offered to employees of nonprofits, public school districts, and other like organizations.

  • 457: 457 plans are typically available to state and local government employees, including police officers, firefighters, and other employees of the public sector.

  • SIMPLE IRA: SIMPLE IRAs are oftentimes used by employers with less than 100 employees. Workers can set aside a portion of their income, while employers have the option to either make a contribution match or elect for a fixed percentage.

  • Profit Sharing Plan: Some employers offer profit sharing plans, in which a portion of the company's profits will be shared and contributed to employee retirement accounts. They tend to vary year to year, however.

There are other possibilities too.

As an employee of a business or governmental agency, though, you don't have control over which of these plans your employer offers as a benefit.


401(k)s are among the most advantageous ways to save, invest, and prepare for retirement. Given that the vast majority of 401(k) eligible workers are also eligible to receive a match, taking this free money should be a no-brainer.

But now, I want to hear from you. How do you save in your 401(k)? Tell me in the comments below!

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About Nathan Zarcaro

Nathan Zarcaro is the founder of The Student Debt Destroyer and is passionate about personal finance related causes.  A 2018 graduate of Providence College's Liberal Arts Honors Program, Nathan studied Finance, and has worked for industry leaders in both finance and healthcare.  In his free time, Nathan enjoys playing golf and traveling with his wife Brigid.

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