Glossary
401(k) Plan
A 401(k) plan is a tax-advantaged retirement savings account offered by employers in the United States. Employees can contribute a portion of their paycheck to the plan, often with employer matching, and investments grow tax-deferred until withdrawal in retirement.
How does a 401(k) plan work?
Employees contribute pre-tax or Roth (after-tax) dollars from their paycheck into the plan. The money is invested, and any growth is tax-deferred until retirement withdrawals.
What is the 401(k) contribution limit?
As of 2025, the contribution limit is $23,000 for individuals under 50, and $30,500 for those 50 and older (including a $7,500 catch-up contribution). Limits may change annually.
Do employers have to match 401(k) contributions?
No, but many do offer a match (e.g., 50% of the first 6% you contribute). Matching contributions are essentially free money toward your retirement.
What happens to my 401(k) if I change jobs?
You can leave it with your old employer, roll it over into your new employer’s plan, transfer it to an IRA, or cash it out (though taxes and penalties may apply).
When can I withdraw money from a 401(k) without penalty?
You can begin penalty-free withdrawals at age 59½. Early withdrawals may incur a 10% penalty plus income tax unless certain exceptions apply.
Is a 401(k) plan better than an IRA?
Both have advantages. A 401(k) often includes employer contributions and higher limits, while an IRA may offer more investment choices and flexibility.
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