Introduction to 401(k) Plans

What is a 401(k)?

A 401(k) is an employer-sponsored retirement savings plan available in the U.S. It allows employees to set aside a portion of their paycheck into a retirement account. These contributions are either pre-tax (Traditional 401(k)) or after-tax (Roth 401(k)), offering significant tax advantages. Contributions grow tax-deferred, meaning the funds are not taxed until withdrawal in retirement.

Types of 401(k) Plans

• Traditional 401(k): Contributions are made with pre-tax dollars, reducing taxable income in the year they are contributed. Both contributions and earnings are taxed upon withdrawal in retirement.

• Roth 401(k): Contributions are made with after-tax dollars, providing no immediate tax benefits. However, withdrawals, including earnings, are tax-free in retirement if certain conditions are met.

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