What Is a 401(k) Retirement Savings Plan?

If you go to work for a large private employer, chances are you will be offered a 401(k) account. This tax-friendly retirement plan allows you to save and invest for retirement through payroll deductions. Since its inception 40 years ago, the 401(k) has become the retirement plan of choice for many employers, which have moved away from providing traditional pension plans. In 2017, assets in 401(k)s totaled $5.3 trillion.

How does a 401(k) plan work?

Contributions to a traditional 401(k) are deducted from your paychecks before the money is taxed. You determine if you're younger than 50. If you're age 50 or older, you can get an added savings boost by making up to a $6,000 catch-up contribution, which brings the annual maximum 401(k) contribution to $24,500. The money you save in a 401(k) account grows tax-deferred until you withdraw it in retirement. At that point, you will owe ordinary income tax on the withdrawals. If you take out money before age 59½, you generally will be hit with a 10% early-withdrawal penalty on top of taxes.