401(k)
Definition
An employer-sponsored retirement savings plan that allows employees to contribute pre-tax income, often with matching employer contributions.
A 401(k) is a tax-advantaged retirement savings plan offered by many employers in the United States. Employees can contribute a portion of their pre-tax salary, reducing their current taxable income. Many employers match a percentage of contributions, which is essentially free money.
For 2026, the annual contribution limit is $23,500, with an additional $7,500 catch-up contribution for those age 50 and older. Traditional 401(k) contributions are tax-deferred, meaning you pay taxes when you withdraw in retirement. Roth 401(k) options allow after-tax contributions with tax-free withdrawals in retirement.
Maximizing your 401(k) involves contributing at least enough to capture the full employer match, gradually increasing contributions over time, choosing low-cost index funds, and avoiding early withdrawals which incur a 10% penalty plus income taxes. The power of compound growth in a tax-sheltered account makes the 401(k) one of the most valuable wealth-building tools available.
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Related Terms
IRA (Individual Retirement Account)
financeA tax-advantaged savings account designed for retirement, offering either tax-deductible contributions (Traditional) or tax-free withdrawals (Roth).
Roth IRA
financeA retirement account funded with after-tax dollars that allows tax-free growth and tax-free withdrawals in retirement.
Vesting
financeThe process by which an employee earns full ownership of employer-contributed benefits over time, such as retirement plan matching or stock options.
Compound Interest
financeInterest calculated on both the initial principal and the accumulated interest from previous periods, causing wealth to grow exponentially over time.
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