A 401(k) is a type of workplace retirement savings plan that allows employees to contribute a portion of their income with pre-tax dollars into their own retirement investment account. Although 401(k)s are the most commonly offered retirement savings plan amongst U.S. employers today, there are many variations such as 403(b), 457, and 401(a) plans that offer similar features and benefits.
Contributions are deducted from your paycheck on a pre-tax basis, which means whatever you contribute reduces your current taxable income. When you eventually make withdrawals during retirement, you’ll have to pay taxes on original contributions and the account’s earnings at your ordinary income-tax rate.
Some employers may also allow you to make Roth 401(k) contributions. Unlike traditional retirement plan deferrals, contributions are made after-tax and withdrawals during retirement are income tax-free. And, unlike Roth IRAs, there are no income restrictions, so anyone can contribute.If you are under age 50, you can put up to $22,500 in your 401(k) each year. If you are over age 50, you can put in an additional $7,500 each year – called a “catch-up contribution”. To see how your own paycheck may be impacted by contributing to a 401(k), use our Paycheck Analyzer Calculator.