401 (K)
Back to GlossaryDefinition
An employer-sponsored defined contribution retirement plan that employees can contribute to and employers may also make matching contributions. 401-K contributions are taxed when withdrawn.
Summary
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax salary to a retirement account. The money grows tax-deferred until withdrawal, typically after age 59½. Many employers offer matching contributions, essentially providing free money toward your retirement. This is one of the most common and effective ways Americans save for retirement.
Usage Context
Essential when studying retirement planning, employee benefits, tax-advantaged accounts, and personal financial planning strategies. Critical for understanding how most Americans build wealth for retirement.
Common Confusions
- Thinking you can freely withdraw money without penalties before age 59½
- Not understanding that traditional 401(k) contributions reduce current taxable income
- Assuming employer match is immediate rather than subject to vesting schedules
- Confusing 401(k) with other retirement accounts like IRAs or pensions
- Not knowing that contribution limits increase annually and are higher for those 50+
