What are California Retirement Options?

Employees in California have multiple ways to save for retirement. Along with a 401(k), California residents can also access retirement benefits through the state-sponsored CalSavers program, which has expanded in recent years. CalSavers was created to give employees who don't have access to a workplace retirement plan a simple way to start saving.

As an employer, it is important to note that California law requires non-exempt businesses to provide access to retirement savings benefits. Larger employers have already had to comply, and by December 31, 2025, employers with as few as one to four employees will also be required to offer retirement benefits, either through a private employer-sponsored plan such as a 401(k) or by enrolling workers in CalSavers.

Before choosing a state-run retirement program, several factors should be considered, including compliance responsibilities, flexibility, and how the offering aligns with your broader employee benefits strategy.

What Is a 401(k) in California?

A 401(k) is a tax-qualified retirement plan that allows employees to contribute a portion of their pay on either a pre-tax or Roth (post-tax) basis, depending on the plan options available.

Employees in California should strongly consider taking advantage of saving in a 401(k) plan if their employer offers this benefit. With traditional pensions continuing to disappear, inflation rates continually on the rise, and the state's high cost of living, workers in California and nationwide face a significant burden in saving for retirement. Starting to save sooner rather than later can put you in a more financially stable position as you approach your golden years.

What Are the Benefits of a 401(k) in California for Employers?

A 401(k) plan can be one of the best tools for helping your employees save for retirement.

Not only that, but there are also many advantages for you, as an employer, to sponsor a 401(k) plan:

• It increases your company's attractiveness in the job market.
• It can positively impact your worker retention efforts.
• It offers business-tax-savings opportunities if you offer a company contribution to participating employees. Employer contributions are tax-deductible, up to applicable Internal Revenue Service (IRS) limits.
• You and other company leaders can participate in the plan.
• It can be relatively straightforward to administer, particularly if you work with a payroll services provider that allows you to automatically transfer participants' contributions into the 401(k).

Benefits of 401(k) Plans for California Employees

California employees can benefit from participating in a 401(k) plan in several key ways, including:

• The ability to place money into a 401(k) plan tax-free, which lowers their taxable income.
• Having a say about how much they want to contribute, which can be helpful for workers at different stages of their retirement savings. A 401(k) calculator can help employees decide what they should contribute throughout their working years.
• Employees nearing retirement age, who are behind on saving, can take advantage of the ability to make catch-up contributions, which allows individuals age 50 or older to make additional contributions into their 401(k).

Who Is Eligible for a 401(k) Plan in California?

In California, any employee whose employer offers a 401(k) can generally participate in the plan, provided they meet the company's eligibility rules. These rules often include factors such as minimum age, length of service, or hours worked. Offering a 401(k) to California employees is one way employers can meet the state's retirement savings mandate, giving workers the opportunity to save through payroll deductions and take advantage of tax benefits.

Are There Potential Penalties in California Associated With a 401(k)?

Making early withdrawals from a 401(k) can result in penalties. If a plan participant withdraws funds before age 59½, they typically face a 10% early withdrawal penalty from the IRS. In California, taking early distributions also means incurring an additional state tax.

Beyond employee withdrawal penalties, employers must also ensure that their 401(k) plans comply with the Employee Retirement Income Security Act (ERISA). This includes upholding their fiduciary responsibility to manage the plan in the best interests of participants, avoid conflicts of interest, and maintain accurate reporting.

California businesses that fail to comply with the state’s retirement savings mandate may face significant penalties. Under current law, non-exempt employers with five or more employees who do not offer a qualified retirement plan or enroll in CalSavers may be fined $250 per employee, increasing to $500 per employee for continued noncompliance. These penalties are already in effect for businesses with five or more employees and will apply to the one-to-four employee group after the December 31, 2025 deadline passes.

To avoid these fines, employers should evaluate available retirement plan options early and ensure they meet the mandate requirements.

Does California Tax Retirement Income?

Retirement account income — even if it isn't withdrawn early — is considered taxable income in California, including withdrawals from a 401(k), IRA, and pension (government pension or private employer pension). Social Security benefits aren't taxed. Given that California tax rates are among the highest in the nation, along with the state's high cost of living, saving for retirement as soon as possible is recommended for Californians.

• 401(k): Contributions are tax-deductible, and withdrawals are taxed, in addition to any other taxable income. Withdrawals are subject to California's state income tax, which ranges from 1% to 13.3% depending on income level.
• Traditional IRA: Contributions are tax-deductible, earnings grow tax-free and withdrawals are subject to income tax.
• Roth IRA: Contributions are not tax-deductible, and qualified withdrawals are tax- and penalty-free (both federal and California state taxes).
• Pensions and Annuities: Per the IRS, the taxable part of a pension or annuity is generally subject to federal income tax withholding. You may be able to choose not to have income tax withheld from your pension or annuity payments (unless they're eligible rollover distributions), or specify how much tax is withheld.

When planning for retirement in California, both employers and employees should understand how each type of income is taxed and plan accordingly.

Can I Use My 401(k) Plan If I Am Unemployed?

If you're unemployed and meet specific criteria in California, you may not be subject to early withdrawal penalties. Workers age 55 to 59½ can access 401(k) funds only (not money in an IRA) without penalty if they are laid off, fired, or quit. However, this only applies to assets in a current 401(k) plan (the plan sponsored by the employer where the employee was laid off, fired, or quit).

Money in a former 401(k) plan is not immediately accessible without penalty. This means the individual would have to wait until age 59½ to begin withdrawing from their entire nest egg without incurring the 10% IRS penalty. Remember, regardless of when you take distributions from a 401(k) plan, California residents will also be taxed on this money.

Unemployed individuals can also receive substantially equal periodic payments (SEPP), a method of distributing funds from an IRA or other qualified retirement plan before age 59½ without incurring an IRS penalty. This may be an alternative to claiming unemployment benefits, but these withdrawals will still be taxed as income.

Ultimately, however, any money you take out of a 401(k) or other retirement plan, regardless of the reason, will decrease the long-term value of your portfolio and set you back in your ultimate retirement savings goals. That's why drawing down from a 401(k) plan should be an option only for true emergencies.

Do Withdrawals From a 401(k) Affect Unemployment Benefits in California?

California considers past earnings and requires unemployment applicants to meet specific minimum income thresholds to receive benefits from the state. Under California law, withdrawals from 401(k) plans are considered taxable income and may reduce an individual's weekly unemployment benefits.

Is There a Minimum Employee Contribution to a 401(k) Plan in California?

For employees, there is no minimum amount they need to contribute to a 401(k) in California, but there are maximum contribution limits as outlined by the IRS:

• 2025 maximum 401(k) contribution limit: $23,500
• Additional catch-up contribution for individuals 50 or older: $7,500

Under the SECURE 2.0 Act, individuals aged 60 to 63 may also be eligible to make catch-up contributions of up to $11,250, provided their retirement plan allows it. These expanded limits give employees nearing retirement age more flexibility to boost their savings.

What If a California Employer Doesn't Offer a Retirement Program?

Officials in California established CalSavers, a state-facilitated retirement savings program that allows businesses to offer to their employees. Private-sector businesses that meet specific criteria must provide the state program, which is set up as a Roth IRA, or establish a similar qualified retirement plan. The next deadline to register employees for the program or establish a plan, scheduled for Dec. 31, 2025, will require non-exempt businesses with one to four employees to comply with the mandate. Any business that already offers a qualified retirement savings plan, such as a 401(k), must register for an exemption.

When an employer registers the business for the state-facilitated option, employees will be automatically enrolled in CalSavers. However, they can choose to opt out of and into the program at any point. If employees do not act within 30 days of notification after an employer registers for the program, they will be automatically enrolled at the default savings rate of five percent of gross pay.

Are California Employers Required to Use CalSavers?

No. Employers that meet specific criteria as outlined by the state must either register for the CalSavers program by their applicable deadline — December 31, 2025, for businesses with one to four employees — or offer their own qualified retirement plan, such as a 401(k) or SIMPLE IRA, to satisfy this requirement. Businesses that offer their own plan must register for an exemption as part of the mandate.

CalSavers deadlines and requirements:

• Sept. 30, 2020 (passed): Businesses with 100-plus employees
• June 30, 2021 (passed): Businesses with 50-plus employees
• June 30, 2022 (passed): Businesses with 5-plus employees
• Dec. 31, 2025: Businesses with 1-4 employees

Can California Employers Opt Out of CalSavers?

Retirement plans that employers can offer instead of CalSavers that meet the state mandate include:

• 401(a)
• 401(k)
• 403(a)
• 403(b)
• 408(k)/Simplified Employee Pension (SEP) Plan
• 408(p)/SIMPLE IRA
• 457(b)

What Is the Difference Between a 401(k) and Other Retirement Programs in California?

The chart below shows key differences between a state-sponsored IRA, a SIMPLE IRA, and 401(k) plan in California. Note certain factors, such as the availability of a company match, annual contribution limits, and the ability to receive employer tax credits. Administrative responsibilities are also a significant factor. A third-party administrator, such as Paychex, can assist employers with SIMPLE IRAs and 401(k) plans, whereas the responsibilities of a state-sponsored plan typically fall primarily to the employer.

For employers wondering: Are employers required to offer 401(k) in California? The answer is that every eligible business must provide access to some type of retirement program — whether through CalSavers, a 401(k), or another qualified plan such as a SIMPLE IRA.

Can Employees Enroll in Multiple Retirement Plans in California?

Employees may contribute to more than one retirement account, but IRS limits apply. In 2025, the deferral limit for 401(k) and similar plans is $23,500 (plus $7,500 if age 50+), while the IRA limit is $7,000 (plus $1,000 if age 50+).

For a SIMPLE IRA, the employee deferral cap is lower — $16,000 in 2025 (plus $3,500 if age 50+). If someone contributes to both a SIMPLE IRA and another employer plan (like a 401(k) at a second job), their combined deferrals still can't exceed the overall $23,500 annual limit.

Choosing the Right Retirement Plan for Your California Business

The ability to have access to retirement savings vehicles and contribute to them is a goal that is becoming clearer for nearly all state residents considering a California retirement. Whether an employer offers a 401(k) plan or institutes the CalSavers state-sponsored retirement program, employees across the Golden State should stay up-to-date on state retirement programs and take advantage of options currently available to them.

Employers should consider all types of plans before choosing a retirement program for employees, including industry-leading 401(k) plans and services that can help streamline plan management and control costs. Keep up with changing retirement regulations and offerings for California employers and get help with your other benefits, HR, and payroll needs.