401(k) Plan

A 401(k) plan is a tax-advantaged retirement savings account offered by many U.S. employers to help employees save for retirement. Participants contribute a portion of their salary on a pre-tax or post-tax (Roth) basis, and employers often match contributions up to a certain percentage. Funds are typically invested in a mix of mutual funds, ETFs, or target-date funds.

401(k) contributions grow tax-deferred, meaning you don’t pay taxes on investment gains until you withdraw the funds—usually after age 59½. Early withdrawals may be subject to income tax and a 10% penalty.

Key Features of a 401(k) Plan

Pre-tax and Roth Options: Traditional 401(k) contributions reduce your taxable income now, while Roth 401(k) contributions are made with after-tax dollars but grow tax-free.

Employer Match: Many companies match a portion of your contributions, offering a significant boost to your retirement savings.

Contribution Limits: The IRS sets annual limits. For 2024, the limit is $23,000 (plus a $7,500 catch-up for those 50+).

Investment Options: You can invest in a range of mutual funds, ETFs, and occasionally bonds or target-date funds.

Required Minimum Distributions (RMDs): Starting at age 73, you must begin withdrawing a minimum amount annually from your account.

Why a 401(k) Plan Matters for Investors

Tax Benefits: A 401(k) allows your investments to grow without being taxed yearly. Roth accounts provide tax-free withdrawals in retirement.

Compounding Growth: Tax-deferred growth and regular contributions can compound over decades, leading to significant long-term savings.

Financial Independence: Having a 401(k) supports long-term wealth building and helps ensure you aren’t reliant solely on Social Security.

Employer Incentive: Free money through matching contributions is a benefit no investor should ignore.

Top 10 Most Common Questions About 401(k) Plans

• What is a 401(k) plan?

  It’s a retirement account sponsored by your employer where you contribute part of your paycheck before (or after) taxes.

• How much can I contribute to a 401(k)?

  For 2025, the annual limit is $23,500. 

• What’s the difference between a Traditional and Roth 401(k)?

  Traditional 401(k) contributions are pre-tax; Roth 401(k) contributions are after-tax and allow for tax-free withdrawals.

• When can I withdraw money from my 401(k)?

  Generally after age 59½. Earlier withdrawals are subject to tax and a 10% penalty.

• What happens if I withdraw early?

  You’ll pay income tax and may incur a 10% early withdrawal penalty unless an exception applies.

• What is an employer match?

  An employer contributes to your 401(k) based on your own contributions, often up to a specific percentage.

• Can I lose money in a 401(k)?

  Yes, your investments can fluctuate in value depending on market performance.

• Are there fees associated with 401(k) plans?

  Yes, investment and administrative fees may apply, so it’s important to review plan details.

• Do I have to take money out of my 401(k)?

  Yes. Once you reach age 73, you must take Required Minimum Distributions (RMDs).

• Can I roll over my 401(k) if I leave my job?

  Yes. You can roll it into IRA  or another 401(k) without taxes if done correctly.

Example

You work for a company that offers a 401(k) with a 100% employer match up to 5% of your salary. You earn $60,000 annually and contribute 10% ($6,000) to your 401(k). Your employer contributes another $3,000 (5% match), giving you a total of $9,000 invested for the year.

Your contributions are invested in a mix of mutual funds and ETFs, and you don’t pay any taxes on the gains until you start withdrawing after retirement.