A 401(k) is a type of retirement savings plan offered by many employers in the United States. It allows employees to save and invest a portion of their income for retirement. It's important to note not all employers offer 401(k) plans, and the terms of the plan can vary depending on the employer.
Some key features and benefits of 401(k) plans include:
Employee contributions: These are the dollars you contribute from your own paycheck to the account. Most 401(k) plans allow you to contribute on a pre-tax basis, meaning you do not pay income tax on the dollars you put in. Much like a traditional IRA, you typically pay tax on the money you take out when you retire, instead. Some 401(k) plans also allow their employees to make Roth contributions. Much like a Roth IRA, these contributions grow tax-free and you do not pay income tax when you use the money in retirement assuming you meet certain requirements.
Employer contributions: Many employers will match a portion of what you contribute, which can significantly increase your retirement savings over time.
Investment options: 401(k) plans typically offer a variety of pre-selected investments for you to choose from.
Contribution limit: Much like IRAs, 401(k) plans also have contribution limits.
Catch up contributions: Most plans allow you to contribute an additional amount, above the normal amount if you are over 50 years old.
Penalties for early withdrawals: If you take money out of your 401(k) plan before age 59 ½, you typically have to pay income tax and penalties.
Automatic savings: Contributions are usually made automatically through payroll deductions. This can make it easier to save for retirement because the money is taken out of your paycheck before you have a chance to spend it.
Portability: The money an employee saves in a 401(k) plan belongs to them. The account can be rolled over to another retirement plan if you change jobs. However, you may not be able to take the employer contributions with you, depending on how long you worked for the company.
Loans: Most 401(k) plans allow employees to take a loan against their account, up to a certain amount. This can be helpful in case of an emergency, but it is important to remember that you may have to pay interest on the loan. Also, if it is not repaid in time, it may be treated as an early withdrawal, resulting in taxes and penalties.