What is a 401(k)?

A 401(k) is an employer-sponsored, tax-advantaged retirement savings plan. It allows employees to contribute a portion of their paychecks to the account. Contributions and earnings grow tax-deferred until withdrawal in retirement.

Some employers choose to match a percentage of employees’ contributions, providing an additional incentive for participation.

There are various types of 401(k) plans:

  • Traditional 401(k) plans include pre-tax contributions, so account holders pay taxes on their holdings at withdrawal
  • Roth 401(k) plans include after-tax contributions, offering tax-free withdrawals in retirement

401(k) plans offer individuals a whole host of investment options, from stocks and bonds to mutual funds. However, these plans are subject to contribution limits set by the Internal Revenue Service (IRS) each year, and early withdrawals may incur penalties.

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