What Is a 401(k)?
A 401(k) is a retirement savings account offered through your employer. The name comes from section 401(k) of the tax code — it's not an acronym or a brand name, just a legal reference that stuck.
What makes it special: the government gives you a tax break to encourage long-term retirement savings. You contribute pre-tax dollars from your paycheck, invest them, and they grow tax-deferred until retirement. You only pay taxes when you withdraw the money in retirement.
How Contributions Work
You elect a percentage of your gross pay to contribute each paycheck. This money is deducted before federal income tax is calculated — which has two effects:
- Your taxable income goes down (you pay less in taxes today)
- Your take-home pay goes down by less than your full contribution
The Tax Advantage: Traditional vs. Roth
Most KC employees can choose between two types of 401(k) contributions:
Traditional (pre-tax) 401(k):
- Contributions reduce your taxable income now
- Growth is tax-deferred
- Withdrawals in retirement are taxed as ordinary income
- Best if you expect to be in a lower tax bracket in retirement than you are today
Roth 401(k):
- Contributions are made with after-tax dollars (no immediate deduction)
- Growth is tax-free
- Qualified withdrawals in retirement are completely tax-free
- Best if you expect to be in a higher tax bracket in retirement, or if you want tax-free income flexibility in retirement
The Employer Match: The Most Important Part
Most 401(k) plans include some form of employer match — free money deposited by your employer in addition to your own contributions. KC's match structure includes:
- 3% flat: KC contributes 3% of your pay regardless of what you contribute
- Dollar-for-dollar match up to 2%: For every dollar you contribute (up to 2% of pay), KC matches it
Contribute at least 5% to capture the full KC match. Anything less means you're leaving employer contributions unclaimed.
How Investments Work Inside a 401(k)
Your 401(k) contributions don't sit in cash — they're invested in funds you select from your plan's menu. Common options include:
- Target-date funds: The simplest option — you pick the fund closest to your expected retirement year (e.g., "2055 Fund" if you'll retire around 2055), and the fund automatically shifts to a more conservative allocation as you approach retirement
- Stock index funds: Track a broad market index (like the S&P 500). Low fees, broad diversification, historically strong long-term returns
- Bond funds: Lower risk than stocks, lower expected returns; useful for investors closer to retirement
- Money market / stable value funds: Very low risk, very low return; suitable only for money you need within a few years
If you've never changed your allocation, check what you're invested in. Many plans default new participants into a stable value or money market fund — which is far too conservative for a 30-year time horizon.
Contribution Limits (2025)
- Employee contributions: $23,500
- Catch-up (age 50+): Additional $7,500 = $31,000 total
- Combined employee + employer limit: $70,000
Accessing Your Money Before Retirement
401(k) funds are meant for retirement — accessing them early comes with costs:
- Early withdrawal (before age 59½): Taxed as ordinary income + 10% penalty on the amount withdrawn
- 401(k) loans: Many plans allow you to borrow against your balance. No penalty or taxes if repaid on schedule, but you lose the investment growth on the borrowed amount while it's out, and the loan may be due immediately if you leave KC
- Hardship withdrawals: Allowed for specific circumstances (medical bills, preventing eviction). Taxes still apply; penalty may be waived in some cases
Treat your 401(k) as untouchable until retirement. Every early withdrawal sets back your retirement timeline and triggers avoidable costs.
What Happens When You Leave KC
Your 401(k) balance is yours — even if you leave KC. Your options:
- Leave it in KC's plan: Allowed if your balance exceeds a minimum threshold (typically $5,000)
- Roll it to your new employer's plan: Consolidates your retirement savings in one place
- Roll it to an IRA: More investment options, no plan fees, full control
- Cash it out: Strongly discouraged — you'll owe taxes + 10% penalty and lose decades of compounding