401(k)
A US employer-sponsored retirement account. Contributions come out pre-tax, grow tax-deferred, and most employers offer a matching contribution.
A 401(k) is a retirement savings plan offered by US employers. You choose a percentage of each paycheck to contribute; that money is deducted before income tax is calculated (lowering your taxable income now), invested in funds you select, and grows tax-deferred until withdrawal — typically after age 59½.
Three things make a 401(k) extremely valuable:
- Pre-tax contributions. A $1,000 contribution to a traditional 401(k) reduces your taxable income by $1,000 — you save the marginal rate (often 22-32%) immediately.
- Employer match. Many employers match a percentage of your contributions, dollar-for-dollar up to some cap (commonly 3-6% of salary). This is 100% instant return on contributions up to the match limit. Capturing the full match is the single highest-ROI thing in personal finance.
- Higher contribution limits. $23,000 in 2024 (rising over time), much higher than an IRA.
Some 401(k) plans also offer a Roth 401(k) option — contributions are after-tax, but withdrawals in retirement are tax-free. Useful for people who expect higher tax rates later than they pay now.
Take the full match before you save anywhere else. Always.
See also
- Roth IRA — A US retirement account funded with after-tax dollars. Contributions grow tax-free and withdrawals in retirement are tax-free.
- Employer match — Money your employer contributes to your retirement account on top of your own contributions, usually as a percentage of your salary.
- Vesting — The process of earning the right to keep your employer's contributions to your retirement account. Leave too early and you forfeit some.
- Pre-tax vs post-tax contributions — Pre-tax contributions reduce your taxable income now but are taxed at withdrawal. Post-tax (Roth) contributions don't reduce taxes now but are tax-free at withdrawal.
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