Can You Start a 401(k) at 18? Eligibility & Rules

A 401(k) is an employer-sponsored retirement savings plan offering tax advantages and investment growth potential. Individuals can set aside a portion of their income for retirement. It is generally possible to start contributing to a 401(k) at age 18, provided employment conditions are met. This article explains the requirements and different types of 401(k) plans.

Eligibility and Employment for a 401(k)

The primary requirement for an 18-year-old to start a 401(k) is employment with a company that offers such a plan. Federal law, specifically Internal Revenue Code Section 401(k), does not impose a minimum age requirement for an individual to participate in a 401(k) plan.

Employers, however, establish their own eligibility requirements, which can include age, hours worked per year, and length of service. Many plans commonly set a minimum age of 21, though some employers may allow younger workers to join. For example, a plan might require an employee to be 21 years old and complete one year of service before becoming eligible.

Self-employment also provides an avenue for an 18-year-old to become eligible for a retirement plan, such as a Solo 401(k). This option is available to individuals who generate income from their own business and have no employees, other than perhaps a spouse. A Solo 401(k) allows the business owner to act as both the employee and the employer for contribution purposes.

Understanding Different 401(k) Options

When considering a 401(k), individuals typically encounter two main types: Traditional and Roth. A Traditional 401(k) allows contributions to be made with pre-tax dollars, which can reduce an individual’s taxable income in the current year. The investments within a Traditional 401(k) grow tax-deferred, meaning taxes are not paid on earnings until the money is withdrawn in retirement.

In contrast, a Roth 401(k) is funded with after-tax dollars, so contributions do not reduce current taxable income. The significant advantage of a Roth 401(k) is that qualified withdrawals in retirement are entirely tax-free, including both contributions and earnings, provided certain conditions are met, such as the account being held for at least five years and the account holder reaching age 59½. For a young earner, a Roth 401(k) can be appealing if they anticipate being in a higher tax bracket during retirement than they are currently.

The Solo 401(k), mentioned previously for self-employed individuals, can also offer both traditional (pre-tax) and Roth (after-tax) contribution options. The choice between Traditional and Roth depends largely on an individual’s current income, anticipated future tax rates, and overall financial goals.

Contributing to Your 401(k)

Once eligibility for a 401(k) is established and a plan type is selected, contributions are typically made through payroll deductions for employer-sponsored plans. An employee specifies a percentage or fixed dollar amount to be withheld from each paycheck, and the employer forwards these contributions to the 401(k) plan provider. This automated process ensures consistent savings and compliance with IRS regulations.

The Internal Revenue Service (IRS) sets annual limits on how much an employee can contribute to a 401(k). For 2024, the employee elective deferral limit is $23,000. This limit applies regardless of the employee’s age. In addition to employee contributions, many employers offer matching contributions, where they contribute a certain amount to the employee’s 401(k) based on the employee’s own contributions.

Employer matching contributions are often subject to a vesting schedule, which determines when an employee gains full ownership of these funds. Common vesting schedules include “cliff vesting,” where an employee becomes 100% vested after a specific period (e.g., three years), or “graded vesting,” where ownership gradually increases over several years (e.g., 20% per year over six years). While employee contributions are always 100% vested immediately, understanding the vesting schedule for employer contributions is important for long-term financial planning. Within the 401(k) plan, employees manage investments by selecting from a menu of available funds, which typically include mutual funds, and may also offer target-date funds that automatically adjust their asset allocation as retirement approaches.