what is 401k

A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages for the saver. It is named after a section of the U.S. Internal Revenue Code. A 401(k) is a defined contribution plan, which means that the employee and employer can make contributions to the account up to the dollar limits set by the Internal Revenue Service (IRS) . Contributions are automatically withdrawn from employee paychecks and invested in funds of the employee’s choosing (from a list of available offerings) . The accounts have an annual contribution limit of $22,500 in 2023 ($30,000 for those age 50 or older) . One benefit of a 401(k) is that it automates saving for retirement and makes investing a bit easier. In addition, many employers will match part of their employees 401(k) contributions, effectively giving them a free boost to their retirement savings. A 401(k) plan lets you reduce your tax burden while saving for retirement. Not only do you get tax-deferred gains but its also hassle-free since contributions are automatically subtracted from your paycheck.