401(k)
AdvancedA 401(k) is a workplace retirement savings plan in the United States, named after a section of the tax code, that lets employees save part of their pay with tax advantages, often with contributions added by the employer.
Employees choose a percentage of their salary to contribute, which is taken directly from their pay. In a traditional 401(k), contributions reduce taxable income now, investments grow tax-deferred and withdrawals are taxed. Many plans also offer a Roth 401(k) option, where contributions are taxed now but qualified withdrawals are tax-free.
Many employers add a matching contribution. For example, an employer might match half of what an employee contributes, up to 6% of salary, which is an immediate boost to savings. Employer contributions may be subject to a vesting schedule.
Employees usually choose from a menu of funds, often including target-date funds as the default. There are annual contribution limits, with extra catch-up contributions allowed for older workers.
Withdrawals before age 59 and a half usually face a penalty plus tax, with some exceptions. When changing jobs, savings can be left in the plan, moved to a new employer's plan or rolled into an IRA. Similar plans exist for public sector and non-profit workers, such as 403(b) and 457 plans.
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