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401(k) Explained

A 401(k) plan is a retirement investment account that you can fund via deductions from your paycheck.

The name “401(k)” is derived from subsection 401(k) of the Internal Revenue Code (Title 26 of the United States Code). This particular retirement plan offers investors benefits that include tax deferral of contributions—which is to say that you do not need to pay taxes on the income that you contribute at the time you make your contribution and, instead, pay taxes upon withdrawal of your funds during retirement.

Additionally, employers may opt to match a percentage of your contributions. Typically, 401(k) accounts allow for higher contribution limits than traditional or Roth IRAs.

Participants 50 and older may be eligible to make “catch-up” contributions up to a set amount.

The other advantage of a 401(k) account is that while it is sponsored by your employer, it is the employee who controls the amount invested..

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