What Is a 401 K Retirement Plan and How Do Participants Benefit?
A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a portion of their paycheck for retirement before taxes are taken out. Taxes are not paid on the money until it is withdrawn from the account.
401(k)s are one of the most popular ways to save for retirement in the United States. It is estimated that about one-third of workers have a 401(k) or similar retirement plan such as a Roth 401(k).
With a traditional 401(k), contributions are not taxed until they are withdrawn at retirement. With a Roth 401(k), contributions are made with after-tax dollars, but they can be withdrawn tax-free at retirement.
Employers may offer matching contributions, which can make 401(k)s an especially attractive way to save for retirement. Employees can typically choose how their money is invested, including options like stocks, bonds, and mutual funds.
Because 401 K retirement plan contributions are made with pretax dollars, the employee’s taxable income is reduced in the year they are made. This can lower employees’ tax bills both in the current year and in retirement when one’s income will likely be lower than it is now. In addition, any earnings on an employee’s investments grow tax-deferred, meaning they won’t have to pay taxes on them until they withdraw the money in retirement.
Employees can typically choose how their money is invested, and they can change their investments at any time. Employees also have the option to take withdrawals from their account before retirement, although they will generally pay a penalty if they do so.