401(k)

A 401(k) is a type of tax deferred retirement account typically offered by employers as an incentive for employees to save for retirement. The plans are called 401(k)’s because of the section of Internal Revenue code that makes them possible.

Payments into the plan, also known as contributions, are made pretax and grow tax free until they are withdrawn during retirement. More recently Roth 401(k) plans have become available where the contributions are made post tax and distributions from the plan are tax free.

One of the major benefits of 401(k) plans over other retirement options is employer matching. Many employers will match their employees contributions to the plan up to a certain percentage. This amounts to free money for the employee which will help fund their retirement.

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