401k

A 401(k) is an employer-sponsored retirement savings plan available in the United States that allows employees to contribute a portion of their earnings into a tax-advantaged account. The plan is named after section 401(k) of the Internal Revenue Code, and it became widely adopted in the 1980s as a way to encourage private retirement saving.

There are two principal forms: the traditional 401(k), where contributions are made on a pre-tax basis and taxes are due on withdrawals, and the Roth 401(k), where contributions are made with after-tax dollars and qualified withdrawals are tax-free. Employees elect deferrals, and many plans offer matching contributions from the employer, which can help boost savings. Auto-enrollment and vesting schedules are common features that affect how quickly employer contributions become the employee’s property.

Contribution limits are set by the IRS and are adjusted periodically. For example, in 2024 the elective deferral limit was $23,000, with a $7,500 catch-up contribution allowed for participants aged 50 and over. The total annual additions limit, which includes employer contributions, was $66,000 (with catch-up contributions allowing a higher combined total for those 50 and older). Limits are reviewed and updated annually.

Withdrawals and taxation depend on the plan type. Distributions from a traditional 401(k) are taxed as ordinary income, while Roth 401(k) withdrawals are generally tax-free if qualified. Early withdrawals are typically subject to penalties and may be restricted by plan rules. Many plans offer loans or hardship withdrawals, and distributions are usually restricted until employment ends or other conditions are met.

Participation is voluntary but common, and the plan is governed by fiduciaries who oversee investment options, fees, and compliance. 401(k) plans are a central component of many Americans’ retirement strategies.