401(k)
A 401(k) is an employer-sponsored retirement savings plan that lets employees contribute a portion of their pre-tax paycheck to investment accounts. Many employers match contributions up to a certain percentage, effectively giving employees free money toward retirement.
401(k) Definition
A 401(k) is an employer-sponsored retirement savings plan that lets employees contribute a portion of their pre-tax paycheck to investment accounts. Many employers match contributions up to a certain percentage, effectively giving employees free money toward retirement.
401(k) in Practice
A small business offers a 401(k) plan with a 3% match. An employee earning $60,000 contributes 5% ($3,000/year). The employer matches the first 3% ($1,800/year). That's $4,800 going into retirement savings annually, with tax benefits on every dollar contributed.
Why It Matters
For employees, a 401(k) is one of the most powerful wealth-building tools available — pre-tax contributions lower your taxable income, and employer matches are free returns. For business owners, offering a 401(k) helps attract and retain talent.
Small businesses can also benefit from tax credits for starting a retirement plan. The SECURE Act offers up to $5,000 per year in tax credits for the first three years of a new plan — making it more affordable than many owners assume.
FAQ
Q: What's the difference between a traditional 401(k) and a Roth 401(k)?
A: Traditional 401(k) contributions are pre-tax (you pay taxes when you withdraw in retirement). Roth 401(k) contributions are after-tax (withdrawals in retirement are tax-free).
Related Terms
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