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401(k) Plan
Definition
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars, often with employer matching.
Explanation
In 2024, employees can contribute up to $23,000 to a 401(k) plus a $7,500 catch-up contribution for those 50+. Many employers match contributions up to 3-6% of salary. Contributions grow tax-deferred until withdrawal, when they are taxed as ordinary income.
Early withdrawals before age 59.5 incur a 10% penalty plus income tax. Some plans offer a Roth option with after-tax contributions for tax-free withdrawals.
Example
An employee earning $70,000 who contributes 10% ($7,000) with a 5% employer match ($3,500) adds $10,500 to their 401(k) annually.