A 401(k) is an employer-sponsored retirement savings plan. It allows employees to contribute on a tax-deferred or after-tax basis while also giving an employer the option to contribute, such as matching and profit sharing contributions. Any taxes due generally aren’t paid until the money is withdrawn from the 401(k) account.
How does a 401(k) plan work?
The employee elects the 401(k) payroll contribution amount and how to invest it based on the investment options the employer has selected to offer. Most plans offer a spread of mutual funds composed of stocks, bonds and money market investments. Target-date funds, a combination of stocks and bonds that gradually become more conservative as the individual reaches retirement age, are another investment option.
Employer matching and profit-sharing contributions are optional in a 401(k) plan.