A 401(k) is a retirement savings plan offered through an employer. Contributions are
deducted directly from your paycheck and invested in a menu of options your employer
selects, typically a mix of mutual funds or target-date funds.
401(k) plans come in two types. A traditional 401(k) uses pre-tax contributions,
which lowers your taxable income today, with withdrawals taxed as ordinary income in
retirement. A Roth 401(k) uses after-tax contributions, with qualified withdrawals
tax-free in retirement.
Many employers match a portion of employee contributions, commonly up to a set
percentage of salary. An employer match is added to your account on top of your own
contribution.
Employer contributions may vest over time, meaning you gain full ownership of
matched funds only after working for the company for a specified period. Your own
contributions are always fully vested.
401(k) balances stay with you when you change jobs. Options include leaving the
balance in the old plan, rolling it into a new employer's plan, or rolling it
into an IRA.