A 401(k) is a workplace retirement plan that lets you direct part of your pay into an account in your name. Your employer may add money too.
What it means
The plan takes the amount you choose from each paycheck and puts it into your 401(k). You then choose from the investments the plan offers, or the plan may use a default investment if you do not choose.
Traditional contributions generally delay federal income tax until money comes out. If the plan offers Roth contributions, those contributions are taxed now and qualified withdrawals can be tax-free later. The plan document controls its match, investments, fees, loans, and withdrawal choices.
A simple example
Jordan earns $5,000 a month and contributes 6%, or $300. Jordan's plan matches dollar for dollar on the first 4% of pay, so the employer adds $200. A total of $500 reaches the account that month.
After 12 months, Jordan has directed $3,600 from pay and the employer has added $2,400, for $6,000 before investment gains or losses. Jordan still needs to choose investments and check when the employer money becomes vested. The match formula and tax treatment belong to this example; another plan can work differently.
What people often miss
A 401(k) is not a guaranteed savings account. Its value can rise or fall with the investments inside it, and fees reduce what you keep.
Contribution limits and plan rules change. Your own plan's summary and the current IRS rules—not a coworker's account—tell you what applies.
Three questions worth asking
- How much do I contribute from each paycheck?
- What employer money is available, and when does it vest?
- Which investments and fees are inside the plan?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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