401(k) Plan
What Is a 401(k) Plan?
A 401(k) plan is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their paycheck to a retirement account on a tax-deferred basis. Contributions are typically invested in a selection of funds such as mutual funds, target-date funds, or other investment options offered by the employer’s plan.
The plan is named after Section 401(k) of the Internal Revenue Code, which governs the tax treatment of these retirement accounts.
Why It Matters
A 401(k) plan is one of the most common ways workers save for retirement. Contributions reduce taxable income in the year they are made, and investment earnings grow tax-deferred until funds are withdrawn.
Many employers also provide matching contributions, which can significantly boost retirement savings.
How a 401(k) Plan Works
Employees choose a percentage or dollar amount to contribute from their paycheck.
Typical features include:
- payroll deduction contributions
- employer matching contributions
- tax-deferred investment growth
- diversified investment options
- retirement-focused withdrawal rules
Funds grow through investment returns and compounding over time.
401(k) Plan vs IRA
- A 401(k) plan is sponsored by an employer.
- An Individual Retirement Arrangement (IRA) is opened independently by an individual.
FAQs About 401(k) Plans
Do employers have to offer a 401(k)?
No, offering a plan is voluntary for employers.
What happens if you change jobs?
Funds may be rolled over into another retirement account.
Are withdrawals taxed?
Traditional 401(k) withdrawals are generally taxed as income.
Related Terms
