A 401(k) plan is a tax-advantaged, employer-sponsored retirement savings account offered by companies to their employees in the United States. It allows you to automatically invest a portion of your paycheck into the stock and bond markets before taxes are taken out
Here is a breakdown of how they work, the two main flavors, and the current rules.
How a 401(k) Works
Automatic Deferrals: You choose a percentage of your salary to automatically route into your 401(k) account every payroll period.
The “Employer Match”: Many companies offer free money to incentivize saving. For example, if they offer a 50% match up to 6%, and you contribute 6% of your salary, they will add an extra 3% completely free.
Tax-Deferred Growth: Any dividends, capital gains, or interest earned inside the account grow tax-free until you withdraw the money in retirement.