What 20-Somethings Should Know About 401(k) Retirement Plans

If you’re a current college student or recent graduate, you may be overwhelmed trying to navigate life as a young adult. Between rent, student loans, and choosing a full-time career, long-term goals like retirement can seem like a future concern. You might not be thinking about a 401(k) yet or even know what it is. However, your 20s are the perfect time to learn and start saving. Keep reading for answers to seven common questions about 401(k) plans.

What is a 401(k) and a Roth 401(k)?

A 401(k) is a type of retirement savings plan offered by many employers. With a traditional 401(k), a portion of your paycheck is set aside before taxes, allowing you to save or invest money while reducing your taxable income. This is a great way to begin saving for retirement at a young age. 

A Roth 401(k) is also an employee-based savings plan, but it works a bit differently. Contributions to a Roth 401(k) are made after taxes have been taken out of your paycheck. This plan can be a smart option for those who think they are going to have a higher amount of income taxes later in life.

Why should I start saving in my 20s?

Most Americans retire in their early 60s. Although that seems far off, beginning to save for retirement when you’re young allows you to maximize your compound interest. Compound interest is the type of interest that slowly builds on itself, meaning that you can start off contributing a small amount but in the long run, have a great deal of savings. You should start saving for retirement in college or shortly after graduating. For example, if a person contributes $25 every month to an account that accrues 7% interest, he or she will have $59,890.53 after 40 years. That’s a profit of almost $48,000 – from pure interest.

How much should I contribute to my 401(k) and how?

There is no minimum amount for how much you should add to your 401(k) each year, but it’s smart to take full advantage of your employer’s matching program. This match is extra money your employer adds to your 401(k) based on how much you contribute, which is essentially free money toward your retirement. Be sure to ask about the match details so you can plan your 401(k) contributions wisely. Most plans include tools or calculators to help you figure out how much to save and whether you're on track for retirement. It is effortless to contribute as well; employers will generally go over all investment options when you are eligible or during job orientation.

How much can I contribute to my 401(k)?

As of 2025, you can contribute up to $23,500 annually, not including any employer contributions. With employer matching, the total combined contribution limit is $70,000 per year. When you’re 50 or older, you're also eligible for catch-up contributions, allowing you to add an extra $7,500 each year to help boost your retirement savings.

Can I withdraw money before I retire?

By law, withdrawals by active employees are permitted only for qualified financial hardship reasons. These reasons may include paying college tuition, buying a primary house, covering non-reimbursed medical expenses, or other qualified financial hardships. Some employer plans allow penalty-free withdrawals starting at age 59 ½. Once you reach the age of 73, you must start taking required minimum distributions (RMDs) each year. 

Can I borrow from my 401(k)?

This depends on if your employer offers it. The Motley Fool found that 87% of employer’s 401(k) plans allow for employees to borrow from their balance. However, you will have to pay the amount back along with interest on the borrowed amount. Borrowing from your 401(k) is usually not the best idea because if not paid on schedule, it can result in some hefty fines.

What happens if I leave my current job?

If you happen to leave your job, you typically have the option to rollover your current 401(k) savings into a 401(k) account at your next job. You can also transfer it to an individual retirement account (IRA). Make sure to transfer the balance instead of withdrawing it. While it might be tempting to have the extra funds, withdrawing the money can trigger steep taxes and early withdrawal penalties. This could put a significant dent into your retirement savings.

Even with the chaos of school, graduation, or job hunting, remember that it’s always important to think about the future – which includes saving for retirement. Starting early gives your money more time to grow through compound interest, helping you build a stronger financial future. Smart financial planning in your 20s can make a big difference down the road.

Disclaimer: The information on this page should not be considered investment or tax advice; talk with your employer’s HR Department about the advantages of participating in a 401(k) plan.