What it is
A 401(k) is a popular employer-sponsored retirement savings plan in the United States, named after a section of the Internal Revenue Code. Employees contribute a portion of their pre-tax salary, which then grows tax-deferred, meaning taxes are not paid until retirement. Many employers offer matching contributions, effectively providing "free money" to employees. Contributions are invested in a selection of funds, such as mutual funds, chosen by the plan participant.
Contributions to a traditional 401(k) reduce an individual's taxable income in the year they are made, offering an immediate tax benefit. Withdrawals in retirement are taxed as ordinary income. Funds typically cannot be withdrawn without penalty before age 59½, with some exceptions. The plan is a cornerstone of retirement planning for many retail investors, offering a structured way to save and invest for the long term with significant tax advantages and potential employer support.
Why it matters
A 401(k) is a primary tool for retirement savings, offering tax benefits and often employer matching. Maximizing contributions, especially matching, is crucial for long-term wealth.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice