What is a 401(k)?

A 401(k) is a retirement savings account offered by employers to their employees in the United States. It is named after the section of the Internal Revenue Code that governs this type of account. A 401(k) allows employees to save and invest a portion of their paycheck before taxes are taken out, which can help reduce their taxable income.

How does a 401(k) work?

With a 401(k), employees can choose to contribute a percentage of their salary to the account, often with some amount of matching contributions from their employer. The money in a 401(k) can be invested in a variety of options such as stocks, bonds, mutual funds, and other assets, giving employees the opportunity for their savings to grow over time. The investments in a 401(k) account can also grow tax-deferred until retirement.

Benefits of a 401(k)

One of the primary benefits of a 401(k) is that it provides a tax-advantaged way for employees to save for retirement. Additionally, many employers offer matching contributions, which can help employees boost their savings even further. 401(k) accounts are also portable, meaning that employees can typically roll over their account to a new employer if they change jobs.

In conclusion, a 401(k) is a powerful tool for retirement savings that offers tax advantages, investment opportunities, and potential employer contributions, making it a popular choice for many working individuals in the US.