A 401(k) plan is a tax-advantaged retirement savings plan offered by employers in the United States. Employees can contribute a portion of their pre-tax salary to the plan, reducing their current taxable income. Taxes are paid when money is withdrawn during retirement.
Many employers offer matching contributions, essentially providing free money to employees who participate. For example, an employer might match 50% of employee contributions up to 6% of salary. If you earn $50,000 and contribute $3,000, your employer would add $1,500.
401(k) plans offer various investment options including mutual funds, stocks, and bonds. The contribution limits are set annually by the IRS. These plans are one of the most effective tools for building retirement wealth, especially when combined with employer matching.