The most common type of retirement plan offered by employers to their employees. 401(k) plans are defined contribution plans, meaning that you make regular contributions into your individual account. Your contributions are automatically transferred from your paycheck before taxes are deducted, which lowers your tax bill. In some plans, the employer also makes contributions, matching the employee’s contributions up to a certain percentage.
You decide on the amount of your contributions, up to certain annual limits. You also decide how your money is invested by choosing from a selection of mutual funds and other investments offered by your employer.
You don’t pay taxes on the investment earnings in your account; your money grows tax-free through the years. When you withdraw the money at retirement, you will pay income tax on it.
