401(k)
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars, with potential employer matching, and tax-deferred growth until withdrawal.
Exam Tip
401(k) is employer-sponsored. IRA is individual. Know the contribution limits!
What is a 401(k)?
A 401(k) is a tax-advantaged retirement savings plan offered by employers. Named after section 401(k) of the Internal Revenue Code, it allows employees to save and invest a portion of their paycheck before taxes are taken out.
Key Features
| Feature | Description |
|---|---|
| Contribution Limit (2025) | $23,500 ($31,000 if 50+) |
| Tax Treatment | Pre-tax contributions, taxed at withdrawal |
| Employer Match | Many employers match a percentage |
| Vesting | Match may vest over time |
| Early Withdrawal | 10% penalty before age 59½ |
Traditional vs. Roth 401(k)
| Type | Contributions | Withdrawals |
|---|---|---|
| Traditional 401(k) | Pre-tax (reduces taxable income now) | Taxed as ordinary income |
| Roth 401(k) | After-tax (no current tax break) | Tax-free in retirement |
Required Minimum Distributions (RMDs)
Starting at age 73 (as of 2023), you must begin taking required minimum distributions from traditional 401(k) accounts. Roth 401(k)s also have RMDs unless rolled to a Roth IRA.
401(k) Loans
Many plans allow you to borrow up to 50% of your vested balance (max $50,000). The loan must be repaid within 5 years, or it becomes a taxable distribution.
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Related Terms
IRA (Individual Retirement Account)
SecuritiesAn IRA is a tax-advantaged personal retirement savings account that individuals can open independently, offering either tax-deductible contributions (Traditional) or tax-free withdrawals (Roth).
Roth IRA
SecuritiesA Roth IRA is a retirement account funded with after-tax dollars that grows tax-free and allows tax-free withdrawals in retirement, with no required minimum distributions.