Finance Dictionary
401(k)
Definition
A retirement savings plan sponsored by an employer.
Deep Dive
A 401(k) is a popular employer-sponsored retirement savings plan in the United States, allowing employees to contribute a portion of their pre-tax salary to an investment account. These contributions grow tax-deferred, meaning taxes are not paid until retirement when withdrawals are made. Many employers enhance this benefit by offering matching contributions, effectively providing "free money" to employees, significantly boosting their retirement savings over time.
Examples & Use Cases
- 1An employee deducting 10% of their bi-weekly paycheck, totaling $500 per month, directly into their 401(k) account
- 2An employer matching 50 cents on the dollar for employee contributions up to 6% of their salary
- 3An individual rolling over their 401(k) from a previous job into an Individual Retirement Account (IRA) to consolidate their retirement savings.
Related Terms
IRARetirement PlanningDefined Contribution PlanEmployer Match